Vijay Kumar Gaba

Thursday, May 22, 2014

King of good times!

Thought for the day

“Great ambition is the passion of a great character. Those endowed with it may perform very good or very bad acts. All depends on the principles which direct them”

- Napoleon Bonaparte (French, 1769-1821)

Word for the day

Nettle (v)

To irritate, annoy, or provoke.

(Source: Dictionary.com)

Teaser for the day

With the confidence instilled in me by the most honest political speech in at least past four decades, I declare the arrival of good times!

Unleash the bulls.

Bears may rest in 10-Janpath till their name is called.

King of good times!

My 9yr old daughter wakes up late in the morning and refuses to do her summer vacation homework. All persuasions in past four days have got one standard reply – Achhe din aa gaye hain (good times have come)!!! Incidentally her summer vacations started from 16^th May, the day election results were announced.

Three months back I had expressed my thoughts on the narrative of nationalism as experienced in my travel to understand the current state of the country during past one year.

For the first time I was confronted with serious doubts about the “Indianness” of “India” and “Indians” as we understand these ideas in common discourse.

Deriving from my discussion on social, political and economic conditions with people of various regions, I doubted that the idea of “Indianness” perhaps only exists in films, army manuals, national holidays (26^th January and 15^thAugust), political speeches and patriotic songs. The compositions my children write describing “Unity in diversity” appeared mythical to me.

I concluded that after 66years of becoming a geopolitical union, India still remains merely the one. It is far from becoming a socio-economic union and even further from becoming a socio-political union.

And I was certainly not alone in my thoughts. “India is merely a geographical expression,” Winston Churchill said in exasperation, more than half a century ago. “It is no more a single country than the Equator.” The founder of Singapore, Lee Kuan Yew, argued that “India is not a real country. Instead it is thirty-two separate nations that happen to be arrayed along the British rail line.”

In his speech yesterday PM designate Narendra Modi became first leader in the country since Lal Bahadur Shastri to exhort that a strong sense of nationalism is imperative for solving most of the problems afflicting the country. He extended both his arms to all the countrymen, especially those opposed to him, to come together and work for betterment of the country.

While many detractors are refusing to take his words and emotions at par, I found it very genuine and moving. Surely, I am not alone in my sentiments.

I have been arguing that the solution to most socio-economic problems afflicting the country could only come from within and only a “politician” can visualize and implement these solutions.

After hearing the PM designate yesterday, I am confident that finally we have a leader who not only is aware of “what is ailing Indian economy?” but also has a credible vision and plan to solve the problems. This completes, in my view, 50% of the job. Balance 50% would be the efficient execution of the plan to actualize the vision. This is something that will depend on so many other factors including will of the people.

InvesTrekk had been highlighting five pre-conditions to turn bullish on equity markets for past couple of years. On my part I have been camping in neutral to marginally positive territory for past 6months. I earnestly believe that it is time to clear doubts and turn positive. I accordingly suggest dropping the pre-conditions.

InvesTrekk proposes to get fully invested in its Model Portfolio (currently 60%) in next 4-6weeks. No change is proposed in the portfolio itself at this stage, but we are evaluating couple of discretionary consumption stories for adding.

Wednesday, May 21, 2014

Who wants some cold nights in Davos

Thought for the day

“It does not matter how slowly you go as long as you do not stop. ”

- Confucius (Chinese, 551-479BC)

Word for the day

Verbicide (n)

The willful distortion of the original meaning of a word.

(Source: Dictionary.com)

Teaser for the day

If this market rally is Modi rally, then 1999 Y2K rally was ABV and 2004-2007 infra rally was MMS.

If you disagree, have a rethink!

Who wants some cold nights in Davos

At the moment Narendra Modi is not giving any impression of a man in hurry. In giving shape to his government, he seems to be to be consulting all the concerned. I guess it is better to iron out all differences well before the government is formed, rather than leaving them unattended and hoping that things will sort out on their own – pretty much a hallmark of the regime Narendra Modi will be replacing.

In the meanwhile, the speculations about likely constitution of Modi’s government are at high. Media pundits, studio experts and bookies, especially those who failed miserably in judging the strong Modi wave across the country during elections, are almost audacious in their anticipation of likely allotment of key portfolio. In their haste, or should I say in chafe, they are again making the same mistake they made during the campaign – anticipating Narendra Modi to be a conventionalist.

Anyways, it’s another 4-5days before this game of conjecturing comes to an end. For record, I do not care who the next finance minister will be, for it is “Narendra Modi” who will be setting the policy agenda.

FM, unlike his/her predecessors, will have the pleasure of reading the budget speech to a thoroughly demoralized opposition, and spending some cold nights in Davos. If I am wrong on this count, I will have no reason to bother about this government anyways.

Besides, a multitude of experts have been busy writing economic agenda for the new government. After spending many hours carefully going through many of these agenda notes, especially by some “victorious” global economists, I have not found an iota of difference from what everyone was telling UPA government for past five years.

Allow FDI in key areas, manage inflation, spur investments, kick start stalled infrastructure projects, and reduce lending costs and taxes for consumers etc. are some of the common suggestions I have been hearing for past so many years. Though no one has apparently offered any “HOW TO?” solution so far.

Going through Unlearning Economics I found an interesting post which quotes extensively from the John Maynard Keynes' The General Theory (TGT), and establishes its relevance to the current context. The following excerpts are in particular relevant:

“In Chapter 14, Keynes explicitly states the point that you cannot measure the 'productivity' of capital independent of its price:

Nor are those theories more successful which attempt to make the rate of interest depend on “the marginal efficiency of capital”. It is true that in equilibrium the rate of interest will be equal to the marginal efficiency of capital, since it will be profitable to increase (or decrease) the current scale of investment until the point of equality has been reached. But to make this into a theory of the rate of interest or to derive the rate of interest from it involves a circular argument, as Marshall discovered after he had got half-way into giving an account of the rate of interest along these lines. For the “marginal efficiency of capital” partly depends on the scale of current investment, and we must already know the rate of interest before we can calculate what this scale will be. The significant conclusion is that the output of new investment will be pushed to the point at which the marginal efficiency of capital becomes equal to the rate of interest; and what the schedule of the marginal efficiency of capital tells us, is, not what the rate of interest is, but the point to which the output of new investment will be pushed, given the rate of interest.

In Chapter 6, Keynes articulates the idea that investment effectively 'creates its own savings':

The equivalence between the quantity of saving and the quantity of investment emerges from the bilateral character of the transactions between the producer on the one hand and, on the other hand, the consumer or the purchaser of capital equipment. Income is created by the value in excess of user cost which the producer obtains for the output he has sold; but the whole of this output must obviously have been sold either to a consumer or to another entrepreneur; and each entrepreneur’s current investment is equal to the excess of the equipment which he has purchased from other entrepreneurs over his own user cost. Hence, in the aggregate the excess of income over consumption, which we call saving, cannot differ from the addition to capital equipment which we call investment. And similarly with net saving and net investment. Saving, in fact, is a mere residual. The decisions to consume and the decisions to invest between them determine incomes. Assuming that the decisions to invest become effective, they must in doing so either curtail consumption or expand income. Thus the act of investment in itself cannot help causing the residual or margin, which we call saving, to increase by a corresponding amount.

In Chapter 7, Keynes offers an argument against the Hayekian Natural Rate of Interest:

Thus “forced saving” has no meaning until we have specified some standard rate of saving. If we select (as might be reasonable) the rate of saying which corresponds to an established state of full employment, the above definition would become: “Forced saving is the excess of actual saving over what would be saved if there were full employment in a position of long-period equilibrium”. This definition would make good sense, but a sense in which a forced excess of saving would be a very rare and a very unstable phenomenon, and a forced deficiency of saving the usual state of affairs. Professor Hayek’s interesting “Note on the Development of the Doctrine of Forced Saving” shows that this was in fact the original meaning of the term. “Forced saving” or “forced frugality” was, in the first instance, a conception of Bentham’s; and Bentham expressly stated that he had in mind the consequences of an increase in the quantity of money (relatively to the quantity of things vendible for money) in circumstances of “all hands being employed and employed in the most advantageous manner”. In such circumstances, Bentham points out, real income cannot be increased, and, consequently, additional investment, taking place as a result of the transition, involves forced frugality “at the expense of national comfort and national justice”. All the nineteenth-century writers who dealt with this matter had virtually the same idea in mind.

Tuesday, May 20, 2014

No change in strategy

Thought for the day

“Computers are useless. They can only give you answers.”

- Pablo Picasso (Spanish, 1881-1973)

Word for the day

Adret (n)

A side of a mountain receiving direct sunlight.

(Source: Dictionary.com)

Teaser for the day

Entire print and electronic media is highlighting caste of new Bihar CM.

Why is it necessary?

No change in strategy

Since Friday afternoon a number of readers have asked me does the unexpected election results warrant any change in investment strategy. In particular, people are asking should we be chasing the financials and infra developers and thereby increasing beta of the portfolio.

To this my reply is that I do not see any reason to change my core investment strategy due to government transition at the center for the simple reason that (a) I follow a strategy which is designed to be mostly policy independent and enjoys an optimum beta relative to macro economic growth.

Insofar as the tactical trading opportunity presented by the (a) global optimism towards global emerging markets and (b) buoyancy in investors’ sentiments due to change in regime, is concerned, I would like to reproduce the strategy summarized at the beginning of current financial year

“In my view it is clear that we are headed towards a major trading rally in Indian equities over next 12-15months. I will not be surprised if this rally actually transcends into bubble territory as the “US rate hike” clamor gains further momentum. Also there is little doubt that this bubble will also meet the same end as the previous ones, more recently 1998-2000 and 2005-2007.

Having this view in mind, I set my strategy for trading with following assumptions:

1. The new government in India will follow the classical Keynesian method to revive economic growth. Both fiscal and monetary stimuli shall be provided to spur consumption and investment demand. Monetary policy will not be further tightened.

2. Government will raise substantial resources through aggressive assets’ sale to recapitalize struggling public sector banks.

3. US Fed achieves the QE tapering target driven by consistent improvement in housing and job market. US rate hike anticipations lead to stronger USD, and massive rotation from US bonds to risk assets like EM equities.

4. No major geo-political event occurs that would create supply disruption in energy market.”

With these assumptions in mind I have been suggesting a “leveraged but beta neutral” trading strategy with a 12-15months time frame. I do not see any need for change on this front also.

In the said strategy piece published on 1 April 2014 I had suggested that “Buy global businesses (IT, pharma, auto ancillaries) as INR completes its correction over next 2-3months,

I feel, I will get this opportunity in next 5-6 weeks. Till then I am looking to book some profit in my trading portfolio, especially stocks which have seen 40-50% rally in past 7weeks.

Sunday, May 18, 2014

Something gotta give

Thought for the day

“My motto is: more good times.”

- Jack Nicholson (American, 1937 - )

Word for the day

Venal (adj)

Willing to sell one's influence, especially in return for a bribe; open to bribery; mercenary.

(Source: Dictionary.com)

Teaser for the day

Narendra Modi’s journey from IGI Airport to BJP office in Delhi on Saturday highlights that India now has a daring, accessible, and risk taker prime minister.

Something gotta give

Expectation is a strange animal. More you beat it, stronger it rises. Consistent underachievement is perhaps the only way to kill it.

The astounding victory of Narendra Modi has beaten all expectations. Consequently, it has raised staggering expectations in all sections of the society.

Mandate 2014 is unmistakably for a person who projected himself as epitome of pragmatism, development, inclusivity, nationalism and good governance. He therefore does not enjoy the luxury of hiding behind the shields like limitation of coalition, party ideology and conventional political paradigms. People have afforded him complete freedom to deliver on the promised change and expect an express delivery from him.

In my view, two tasks need to top his list of priorities –

(a) Bridging the multitude of deficits prevalent in the country, especially trust deficit, governance deficit, compliance deficit, skill deficit, social and physical infrastructure deficit, and capital deficit.

(b) Bringing India into a state of equilibrium by removing social, and regional, economic imbalances.

From anecdotal evidence of Narendra Modi’s administrative and strategic prowess, I believe that he has the ability to drive the change. However, it would be preposterous to assume that he can do it on his own. He would need the support and cooperation of all in his colossal endeavor.

The anecdotal evidence further suggests that a vast majority of 1.26bn Indians is expecting Narendra Modi to deliver for them, at least on economic front. The problem is that no one is willing to give.

I ponder whether -

· Industries and businesses who have thrived historical on government largesse and not necessarily on the enterprising abilities of promoters would be willing to give back to society by way higher taxes, higher voluntary CSR spending, technology upgrade for better resource utilization, etc.;

· Regions like Gujarat and Maharashtra, which are economically more developed despite not being endowed richly with natural resources, would like to acknowledge that a part of their development is due to imperial designs of British regime and share their wealth with exploited regions like Jharkhand and Odisha.

· Caste and communities which command ownership of the major part of economic resources and occupy most of the social space, would like to voluntarily vacate some space for the historically oppressed and downtrodden.

· Populace who has grown to be non-compliant by habit, not necessarily by intention, would like to change habits like spitting on roads, violating traffic rules, encroaching on pavements in front of their house/shops, exploiting domestic helps and child labor etc.

Friday, May 16, 2014

Lets get back to business now

Thought for the day

“One and the same thing can at the same time be good, bad, and indifferent, e.g., music is good to the melancholy, bad to those who mourn, and neither good nor bad to the deaf.”

- Baruch Spinoza (Dutch, 1632-1677)

Word for the day

Vane (n)

A person who is readily changeable or fickle.

(Source: Dictionary.com)

Teaser for the day

L. K. Advani lost to Manmohan Singh in 2009 and to Narendra Modi in 2013.

Why nobody has the guts to convey this to him and all those batting for him.

Lets get back to business now

By now it is widely anticipated that Indian will have a stable government in next few days and the economy in general will improve by the end of current fiscal FY15. The financial markets are vividly reflecting the buoyant sentiments of investors.

Much of the confidence is also emanating from the fact that in general global economy, particularly developed economies are looking fairly stable and showing distinct signs of an imminent recovery. Both the IMF and World Bank, have forecasted the world economy to fare better in next few quarters.

In this backdrop the new government will assume office by end of this month. The popular discussion after polling got over on 12^th May is focused on three broad issues - (a) How many seats NDA will get on its own? (b) Who will get which ministry in the likely NDA government? and (c) What are the immediate economic challenges the new government will have to face?

While the debate on first two issues will get mostly settled in next 2-3 days, the economic issue will remain alive for next few years.

Today morning, as the TV channels are just about to open a marathon result show, I find it pertinent to reiterate my opinion on these issues.

Insofar as the number of seats for NDA is concerned, there is little point in guessing that at this point in time; nevertheless I would like to reiterate that (a) I sincerely believe that Narendra Modi will lead a stable government for at the least next five year. It is however important to note that I will not at all be frustrated if for some reason Mr. Modi fails to make it to 7 RCR. (See here)

On constitution of the government and portfolio allocations in my view the key portfolios should be given to serious politicians and statesmen, who have the ability to think beyond current conditions and into the realm of impossibilities. I believe that induction of non-politicians in key executive posts, including appointment of Manmohan Singh as PM and Kapil Sibal as union minister for HRD, IT and communication has done a tremendous harm to the country. (For more on this see here and here)

The economic challenges before the new government are going to be very pressing and critical. Given the humongous expectations of the electorate, it would be imperative for the government to address at least some of these challenges in the maiden budget itself.

Some of these challenges include price rise, industrial revival, power generation, drinking water and issues arising out of a deficient monsoon.

As the election season winds up this weekend and investors become inclined to listen to issue beyond politics, we shall be discussing the economic issues and the what new government should be doing to address them.

To begin with it is pertinent to note that as per the advance estimates the Indian economy registered GDP growth of 4.86%, marginally higher than the 4.5% of FY13. The country has been witness to a sharp drop in its economic growth from an average 8.2% during FY04 - FY12 to sub 5% in FY13 and FY14.

Thursday, May 15, 2014

Whatever it takes

Thought for the day

“The art of leadership... consists in consolidating the attention of the people against a single adversary and taking care that nothing will split up that attention.”

- Adolf Hitler (German, 1889-1945)

Word for the day

Ad hominem (adj)

Appealing to one's prejudices, emotions, or special interests rather than to one's intellect or reason.

Attacking an opponent's character rather than answering his argument.

(Source: Dictionary.com)

Teaser for the day

In search for a strong leadership, should Congress consider a reverse merger into Trinamool Congress (TMC) of Mamta Banerjee?

Whatever it takes

In summer of 2012 when economists and analysts were busy preparing their obituaries for common currency European Union and peripheral European countries were declared pariahs in the financial market, ECB chairman Mario Draghi took the mantle on himself and declared that he would do “whatever it takes to preserve Euro”. Skeptics did not believe him then.

Two years later, everybody acknowledges that Draghi’s Outright Monetary Transaction (OMT) program has been an overwhelming success. It has successful in not only preserving but strengthening Euro. All peripheral European countries are welcome back in financial markets paying borrowing costs which almost matches the good times. Most troubled countries like Portugal, Ireland, Spain, and Iceland have successfully reigned the fiscal profligacy that led them to the crisis in the first place. The much maligned Greece also does not look too bad at this point in time.

All may still not be well but Europe at least looks a stable place today. Most importantly, all this has been achieved without actually using the OMT mechanism. Just Draghi’s firm and assuring words have done the job.

I expect the new Prime Minister of India (hopefully Modi, but anyone else would also do for me) to do the same. Assure the nation that his government would do “whatever it takes” to put economy firmly back on a sustainable growth path.

· Businesses need to be assured that the government would do “whatever it takes” to address all their valid concerns promptly in a sympathetic manner.

· Youth need to be assured that the government would do “whatever it takes” to adequately equip them to attain a respectable standard of life.

· Farmers need to be assured that the government would do “whatever it takes” to introduce necessary reforms (land, marketing, pricing, rehabilitation, productivity, financing, irrigation and crop technology) to improve their earnings on sustainable basis.

· Women need to be assured that the government would do “whatever it takes” ensure their safety, pride and equality.

· Investors need to be assured that the government would do “whatever it takes” to protect their interest by creating strongest possible deterrence to fraud, malpractices, oppression, and mismanagement by scrupulous promoters, fund managers, and borrowers.

· Common citizens need to be assured that the government would do “whatever it takes” to protect his right to a decent living by containing inflation, providing primary civic amenities closer to his home and defending his right to safe life, food, education, health, clean drinking water, sanitation and shelter etc.

· Bureaucrats need to be assured that the government would do “whatever it takes” not only to protect them for all their actions taken in good faith but to own all such decisions in case of a dispute or allegation of impropriety.