Wednesday, January 15, 2014

It’s like FY2000 only


Thought for the day

“There are two things in New York, euphoria and disaster.”

-          Bill Parcells (American, 1941 - )

Word for the day

Infinitesimal (Adj)

Immeasurably small; less than an assignable quantity:

(Source: Dictionary.com)

Teaser for the day

What if AAP leads the Left Front in general elections to provide a true third dimension to Indian politics with Congress led UPA at center and BJP led NDA to the right?

It’s like FY2000 only


The Indian stock markets are on the edge, waiting to plunge in the bubble territory, much like 1999-00. The long term stock returns (Nifty 5yr CAGR) in 2013 were 16% (much higher than 25yr average of 12%); the yoy delta in long term equity return in 2013 was 17%, highest in three decades. This happened when the long term economic growth slumped below four decade trend line and long term earnings growth had been consistently down to single to low double digit.

The market breadth is as narrow as it was in 1999-00 and volumes poor. The only saving grace is low volatility and low retail participation. I shall watch out for these two factors to turn negative to get a signal of bubble reaching the bursting point.

Tuesday, January 14, 2014

Data is your sword and mine too

Thought for the day
“No poet or orator has ever existed who believed there was any better than himself.”
-Marcus Tullius Cicero (Roman, 106-43BC)
Word for the day
Suppletory (Adj)
Supplying a deficiency.
(Source: Dictionary.com)
Teaser for the day
Mani Shankar Iyer is the best. Says India’s inflation is doing of US Federal Reserve; candidly admits that “If there were an election today, we would do very badly.”

Data is your sword and mine too

The market reaction to poor November IIP data was not at all surprising; especially short covering in financials. Poor industrial growth and lower consumer inflation could be a perfect excuse for RBI not to hike rates on 28th January.
Turning a blind eye to hike in rates by Employees’ Provident Fund Organization (EPFO) which manages majority of retirement savings of Indian workers could however be perilous.
The production and sales data for automobiles, cement, steel etc. indicates that IIP data is not likely to improve in next few months in any significant measures. Inflation may however come back as the fresh winter vegetable stock gets consumed. Remember every year storage cost, wages, interest cost, and transportation charges etc. are rising much faster than the productivity gains. In my view, vegetable and fruit prices shall continue to rise 6-10% every year for next many years, unless some far reaching farm sector and agricultural produce marketing reforms take place.
Yesterday morning, one friend who manages treasury of a midsized corporate showed me an SMS from fund manager of a large fund house. The message exhorted my friend to invest in long dated securities highlighting that in past one decade, benchmark yields have been higher than 9% only for 40days. The current high yields therefore offer a great opportunity. He sought my opinion, given that I have been advocating short duration and FMPs for past couple of years.
In my view, this is an interesting piece of data. But it could be misleading if seen in isolation or without considering a longer series. For example, it would be interesting to see how many times in past one decade we had (a) US liquidity tightening and 10yr yields rising over 100% in a matter of few months; (b) USDINR above 60 level; (c) short term debt over 30% of total debt with high roll over risk; (d) total debt to GDP ratio consistently above 125% with public debt accounting for 2/3rd of total; (e) household debt growth outpacing corporate debt growth; (f) consistently rising investment - savings gap; (g) corporate debt equity over 70%, RoE below 15%; (h) severe financial repression by government through high negative rates; (i) Forex cover for less than 8months of import; and (j) external debt close to 25% of GDP with threat of rating downgrade if elections do not provide a stable government.
It would also be interesting to find how the yields behave during 1990’s, the period which resembles more closely to the current conditions. The benchmark yields were perhaps above 9% for most part of the decade.
The same fund manager has also pointed out that Sensex has given no return for last six years (2008-2013) while earnings have grown over 60% during this period; and therefore it is also a good opportunity to invest in equities.
Never heard 6years as benchmark before! However, if we consider five years (2009-2013), Sensex has given over 100% return with about 50% rise in earnings.
I would continue to advocate short duration, FMPs and high quality equity to be bought over next several months.

Monday, January 13, 2014

Do not mistake moss for green shoots

Thought for the day
“Condemn none: if you can stretch out a helping hand, do so. If you cannot, fold your hands, bless your brothers, and let them go their own way.”
-          Swami Vivekanand (Indian, 1863-1902)
Word for the day
Wamble (v)
To move unsteadily
(Source: Dictionary.com)
Teaser for the day
Delhi government gets 50000 complaints of corruption in three days. What does it mean?
(a)   Aam Aadmi is making fun of AAP.
(b)   Delhi is the worst place to live on this planet.
(c)   Both of above

Do not mistake moss for green shoots

US employment data is one single piece of information global financial markets have watching keenly since US Federal Reserve pegged the monetary stimulus to the job creation.
The latest data suggests fall in rate of unemployment below 7% (6.7% actually) after a long time. A benchmark Fed has highlighted more than once as a key signal of economy normalization and therefore catalyst for winding down the unprecedented accommodative monetary policy.
However, what the headline data does not highlight is that it is not the lower numerator (no. of unemployed persons) that has caused lower unemployment rate, but the lower denominator (total workforce). The denominator dropped from 155.3 million last reading to 154.9 million present reading, implying that the labor participation rate just dropped to a fresh 35 year low, hitting levels not seen since 1978, at 62.8% down from 63.0%. (read more at Zero Hedge)
This means now more Americans are unfit for employment (skill shortage or mismatch), less Americans are willing to work (more dependency) and new job creation is happening in sectors that require higher skills (mostly technology).
I do not know whether India should worry or rejoice about this. Lower unemployment rate means faster winding down of QE and potential 2015 rate hike. Historically a reversal in US rate cycle has been bad for Indian economy and market. Remember, this shall happen when the world’s biggest economies seek to refinance $7.43 trillion of sovereign debt in 2014. Higher rate and lower liquidity shall raise borrowing costs while nations struggle to bring down elevated budget deficits. As per some reports the amount of bills, notes and bonds coming due for G-7 plus Brazil, Russia, India and China is little changed from 2013 after dropping from $7.6 trillion in 2012, according to data compiled by Bloomberg. At $3.1 trillion, representing a 6 percent increase, the U.S. faces the largest tab.
While budget deficits in developed nations have fallen to 4.1 percent of their economies from a peak of 7.8 percent in 2009, they remain about double the average in the decade before the credit crisis began. The cost for governments to borrow may rise further after average yields last year rose the most since 2006, as the global economy shows signs of improving and the Federal Reserve pares its unprecedented bond buying. (read more at Bamboo Innovator here)
The good part is that more skilled professional from India may find jobs in US and other developed countries. The equity market excitement about IT sector might be stemming from this window of opportunity. What market perhaps is not factoring is that relative valuations are about to enter bubble zone and standalone valuations are much further away from fair. Next year US begins the process of next elections and Devyani Khobrgade episode suggests that at least Democrat voices are not going to be kind to India.
The employment, deficit and growth conditions back home are not showing that we are anywhere closer to the bottom of the cycle. Though some are willing to accept slippery moss for green shoots.

Friday, January 10, 2014

Too good to be true! Might be! Perhaps not!

Thought for the day
“I knew it was too good to be true. Some things never change...”
-Unknown
Word for the day
Welkin (n)
The sky; the vault of heaven.
(Source: Dictionary.com)
Teaser for the day
It appears from recent actions of the government that it deliberately allowed US diplomats (any probably many others) to break a number of laws.
Will someone explain why?
Will AAP seek prosecution of officers who failed in their duty to enforce law?

Too good to be true! Might be! Perhaps not!

Five years ago in late summer of 2008, the global financial markets received what was thought to be one of the biggest shocks in history of world finance. The crash of Lehman sent shockwaves across the world. Enormous amount of investors’ wealth was destroyed. Epithets for EU and US were written and rehearsed in right earnest.
The 2013 however saw a dramatic turnaround. And at beginning of 2014 it everything appears superbly normal.
·         TARP money has been mostly refunded.
·         QE has begun to taper. Bond yields have started firming.
·         The feared hyper inflation due to humongous liquidity infusion has failed to make any appearance.
·         US unemployment levels have fallen to more acceptable levels.
·         UK housing prices are above 2007 highs.
·         UK car sales are close to 2006 high levels.
·         To dismay of EU breakup proponents, EU has just got a new member in Latvia.
·         PIGS are flying everywhere. Ireland has already returned to bond market. Greece may soon join the party.
·         Many global equity markets are trading close to or higher than their pre Lehman 2008 high levels.
·         Junk bond issues are close to 2007 highs.
·         Gold, silver and US treasuries, widely considered safe havens, are consensus underweight/sell.
·         JPY is at multi year low to USD and EUR is close to its strongest levels.
·         Most EU yields are at reasonable level.
·         Most analysts are bullish on EU and bearish on EMs.
·         After decades Japan is back on investors’ radar.
·         New theme MIST (Mexico, Indonesia, South Korea and Turkey) has been coined to replace fallen from grace BRICs.
·         China has not crash landed as most feared. The soft landing has been rather well managed.
·         No major war has erupted despite serious provocations. Iran appears to have fallen in line. Egypt, Syria, Libya, are simmering but just that. Pakistan had its first ever democratic change of government and al-Queda has failed to make major strike post Osama elimination.
Instinctively, all this looks amazing - too good to be true. Perhaps it is not! Might be it is! Next week lets attempt to look India under this light or should we say ‘grey shade’.

Tuesday, January 7, 2014

Are we headed towards “mob-rule”?

Thought for the day
“If all misfortunes were laid in one common heap whence everyone must take an equal portion, most people would be contented to take their own and depart.”
-Socrates (Greek,  469-399BC)
Word for the day
Portent (n)
An indication or omen of something about to happen.
(Source: Dictionary.com)
Teaser for the day
Delhi HC says that it is the scheme of the Constitution that every rupee flowing into the consolidated fund of India should be audited by CAG. By this logic all those who pay tax, license fee and royalty etc. to the government could be subject to CAG audit.


Are we headed towards “mob-rule”?

“…democracy ruins itself by excess-of democracy. Its basic principle is the equal right of all to hold office and determine public policy. This is at first glance a delightful arrangement; it becomes disastrous because the people are not properly equipped by education to select the best rulers and the wisest courses”.
"As to the people they have no understanding, and only repeat what their rulers are pleased to tell them";
“to get a doctrine accepted or rejected it is only necessary to have it praised or ridiculed in a popular play. Mob-rule is a rough sea for the ship of state to ride; every wind of oratory stirs up the waters and deflects the course. The upshot of such a democracy is tyranny or autocracy; the crowd so loves flattery, it is so hungry for honey, that at last the wiliest and most unscrupulous flatterer, calling himself theprotector of the people’ rises to supreme power.” (Plato as quoted by Will Durant in “The Story of Philosophy”)
Evolution of a free democratic society occurs broadly in three phases – empowerment of people, enablement of people and engagement of people.
In the empowerment phase people are empowered with constitutional and legal rights so that they could construct the social and economic organizations they would want to live in. The political organization is largely derived from the socio-economic organization of choice. In modern world, parliamentary democracy is the most popular political organization for societies choosing to organize themselves in a free and capitalist economy.
The transition from an aristocracy or oligarchy to parliamentary democracy is often a chaotic process because the people might not be properly equipped by education to select the best rulers and the wisest courses.
In the second, enablement phase of evolution the so empowered people are enabled through a mix of variety of endeavor so that they could pursue the socio-economic path of their choice. Social equality, economic equality and gender equality are some key desired outcome in this phase. Wealth redistribution through taxation, welfare schemes and legislative provisions (like land ceiling, currency elimination, restrictions on business and asset ownership etc.), inclusion of economically poor, socially oppressed and women in government and economic activities are some of the major efforts seen in this phase.
The conflict between the wealthy & powerful (landlord) and the poor & oppressed during enablement phase often causes civil unrest. The inadequacy and inefficiencies of institutional framework to supervise the wealth redistribution process invariably leads to rise in instances of corruption in public life.
Unfortunately, in many cases it is also seen that some intended beneficiaries become too powerful and appropriate power and resources meant for their peers. This creates division and mistrust in the society and elongates the process of enablement.
In the last phase of the evolution, the empowered and enables people take part in the building of strong economic institutions and free market by engaging themselves in the growth and development process. This is usually the golden period for any democratic society that has chosen free market economy as their preferred socio-economic organizational setup. In this phase a large part of the population participates in the virtuous cycle of higher earnings – consuming – saving – investing – earning leading to sustainably higher consumption and investment demand.
In Indian context, our constitutional framework envisaged a democratic social organization with free market economy. The people were constitutionally and legally empowered from day one of constitution coming into effect on 26 January 1950. (Interestingly, the United States of America took almost 200years to give full and equal rights to all its citizens through The Voting Rights Act of 1965).
However, in practice the empowerment process was delayed by at least three decades. Firstly, the Indian National Congress (INC) which was the primary vehicle for freedom movement transformed itself into a political party. The transformation ensured that the Congress Party which was dominated by the feudal lords and elite class at the top became overwhelmingly dominating political force in the country leaving little for the dissent or competition. The policy making thus focused on retaining control of most resources and activities with the government (by proxy with Congress party) and providing for just the elementary necessities to the common man.
All the voices who spoke for social justice, empowerment and enablement were forced either to fall in line with top echelons of the party or quit. The opposition to the Congress thus mostly came from communist/socialist forces which mostly survived on parochial support base amongst some caste, community or region. The empowerment and enablement processes were thus hindered to a great extent.
It was in 1980’s when first time a nationwide movement took shape to seek empowerment and enablement for common people of the country. The enablement process started a decade later with government slowly giving up control over resources and economic activities.
Given that the process of enablement has so far mostly been involuntarily and heavily influenced by electoral considerations rather than social-economic reality, it has been marred by large scale irregularities, corruption, and inefficiencies.
The socialist movement in the country has gained tremendous momentum in past 3 decades. These forces rule many states and often play a critical role in formation and running of the federal government. However, for the lack of a credible and wise leadership, these forces are often seen degenerating into hands of a few vested interests at regional level.
We should analyze the emergence of Aam Aadmi Party (AAP) in light of the failure of the likes of Samajwadi Party (SP) led by Mulayam Singh Yadav, Rashtriya Janata Dal (RJD) led by Lalu Prasad Yadav, Bahujan Samaj Party (BSP) led by Mayawati etc., and continued domination of Congress by feudal forces.
…to continue tomorrow

Monday, January 6, 2014

Twist in stomach

Thought for the day
“I'm Mickey Mouse. They don't know who's inside the suit.”
-Keanu Reeves (Canadian, 1964 - )
Word for the day
Inchoation (n)
A beginning; origin
(Source: Dictionary.com)
Teaser for the day
Populism is mostly irretrievable. You always start by helping people and then it becomes their right.
Twist in stomach
“Politics the study of ideal social organization (it is not, as one ·might suppose, the 'art and science of capturing and keeping office); monarchy, aristocracy, democracy, socialism, anarchism, feminism - these are the dramatis personae of political philosophy. —Story of Philosophy by Will Durant
Of late Arvind Kejariwal led Aam Aadmi Party (AAP) has been causing twist in stomach of most opponents. Congress and BJP which are usually the target of AAP leadership’s gastritis comments and have actually suffered in Delhi election naturally appear more at pain. Though they are maintaining a brave face and mostly dismissive demeanor, their backroom strategists must be working overtime to find ways and means to contain the ‘damage’.
Given that Congress Party in any way is on the back foot and not a favorite to win next elections, BJP is the one which has most at stake. Most regional parties still appear unsure as to how AAP phenomenon will impact their fortunes in times to come.
Only CPM has shown some interest in joining ranks with AAP, which is natural given (a) predominantly Maoist tendencies of AAP and (b) emergence of Arvind Kejariwal as challenger to Narendra Modi.
The financial markets which had almost assumed a Modi led progressive government at helm post May election results, are also having a rethink.
Twenty five to thirty Lok Sabha seats for AAP could upset many calculations, especially for BJP. Given the internal conflicts of Congress Party, it will only be too glad to repeat the Delhi experiment at national level just to keep BJP out of contention.
In my view, there is nothing “marvelous” (“Adbhut” as Mr. Kejariwal likes to put it) in the events that have taken place in Delhi in past couple of month. The changes that are taking place in political landscape of the country are normal evolutionary changes. There is nothing to suggest that these changes could assume revolutionary character.
I feel, the emergence of AAP should be seen as further advancement of the forces of social justice and equality – a process that began with Naxalite movement in 1960’s, gathered momentum with Jaiprakash Narain’s call for Total Revolution, took a leap with constitution of a National Front under N. T. Rama Rao and progressed with emergence of BSP as voice of Dalits.
Mahatama Gandhi’s vision for building a just and equal society (Ram Rajaya) that in fact formed the conceptual basis of our constitution had been an inspiring force behind many of these movements.
AAP is in its nascent stage of building up. Despite its popularity and high TRP value, it is far from becoming a mass movement of people seeking a change. Indubitably the electoral success of AAP and the response it is getting from middle classes strengthens the confidence in Indian democratic traditions and raises hopes of a brighter future. However, the euphoria and sense of sacrifice that is usually needed for such movement to have desired impact is not yet visible. Few plateaued professionals and businessmen joining AAP to make a career in “electoral politics” means little.
In next few days, I shall highlight what AAP could potentially mean for Indian politics & economics and why we are nowhere close to a revolution.