Vijay Kumar Gaba

Thursday, October 16, 2014

Lucky oye!

Thought for the day

”Life is really simple, but we insist on making it complicated."

- Confucius (Chinese,551-479BC)

Word for the day

Habitué (n)

One who habitually frequents a place.

(Source: Dictionary.com)

Teaser for the day

High Court has disqualified 5 HJC MLAs with retrospective effect.

Does it render the legislative decision taken with their votes void ab initio?

Lucky oye!

Yesterday I expressed my concerns over investors in Indian markets relying too much on PM Modi's luck and lower global energy prices. I feel a prudent investment strategy needs to evaluate sustainability of both.

Insofar as the "luck" part is concerned, it is rather simple. Considering PM's lucky time started 14yr ago, some caution would be in order.

Energy prices are far more complex. This involves too many, often diverging, consideration - from geo-political, economic, to financial.

To test the sustainability of current or even lower crude prices, I divide these reasons into three distinct categories - (a) speculative factors predicated on various conspiracy theories; (b) financial reasons arising from currency and commodity market dynamics; and (c) economic reasons based on global consumption/strategic storage demand and supply dynamics.

Conspiracy theories

Numerous conspiracy theories are floating around to explain the precipitated fall in global crude prices, despite escalating geo-political tension especially in the Middle East Asia and Eastern Europe. For example, energy analyst Akhil Handa highlighted the following chatter in the energy markets.

Attempt to corner Russia

Saudi not cutting the production and US increasing production to contain Russia, which derives almost half of its revenue through oil and oil-linked gas sales. According to Sberbank CIB, if oil prices average the current level of $90, then Russia would run a 1.2 per cent budget deficit in 2015 and needs oil to be at about $104 to balance its budget. US and EU have already imposed sanctions on Russia as a reprisal of Russia's Crimea annexation and Eastern Ukraine overtures.

Saudis playing tricks to retain control of oil market

The plot thickens with another conspiracy theory doing the rounds. The Saudi has seen the oil price stable through international geo-political crisis, first by increasing production to accommodate Iran, Syria and Sudan's decreasing production and then by accommodating Iraq's rising production. Saudi has acted as the only global swing producer, which was in control of both its oil production and economy to maintain the price stability.

However with the increase in US oil production- up almost 70 percent in the last 6 years and at its highest since 1986, the Saudi's appear losing control over global oil market. In a bid to restore balance Saudi could be playing its cost advantage against the higher cost shale oil producers. In this scenario, Saudi will perhaps have to let oil prices slide to $75-80 and let it stay there for a while for some US drillers to move out of the businesses and hence pricing power to get restored back with Saudi.

Saudi has already made the first move by reducing its benchmark official selling price to levels lower than the 2008 levels. The adjustment to selling price can be a precursor to major adjustments to production, which will have to eventually follow in case the demand scenario remains weak, in contrast to many market observers belief that Saudi will be able to maintain its market share.....to continue

Tuesday, October 14, 2014

Devil's advocate

Thought for the day

”Death and life have their determined appointments; riches and honors depend upon heaven."

- Confucius (Chinese,551-479BC)

Word for the day

Accidence (n)

The rudiments or essentials of a subject.

(Source: Dictionary.com)

Teaser for the day

List names of 21 politicians whose political career will end on 19th October 2014!

Devil's advocate

The IIP growth data for August 2014 mandates a reality check on Indian economy. It validates our premise that investment led growth is not a valid theme as yet.

In my view the IIP growth data for September may not be substantially better than August . Given the sub-optimal monsoon this year and slow service sector growth, 2QFY15 GDP growth may not meet rather optimist expectations.

Though I do not see a material let down in the optimism over new government in immediate term, the GDP growth forecasts may likely see some downward revision.

In this context the precipitated fall in global energy prices in past six months is critical. Lower energy prices are providing strong support to economic optimism in the country. This single factor is catalyzing optimism over Balance of Payment, inflationary and therefore rate expectations, improvement in domestic power production through cheaper import of coal and gas, improvement in financial stress levels as the struck infra and power sector projects become viable due to lower rates and higher availability of fuel.

When I try to build in a rising energy price scenario in my investment portfolio, the likely outcome is rather unpleasant.

Hypothetically, a 20% rise in crude and international coal prices from here will make macro situation look much more precarious than even 2011-12. The diesel deregulation plans will be deferred again. Electricity prices will go up by another 20-25%. Global demand will take a further hit impacting exports. CAD will worsen. INR will depreciate further and faster. Inflationary expectations will rise materially forcing RBI to break the pause on rates. Savers will be crushed as real rates take a further dip, leading to sharper decline in already receding savings rate. Financial stress will rise as more projects become unviable due to higher rates, lower demand, waning pricing power.

In short we will have a serious problem of stagflation at a time when global money markets will be tighter and investment climate seriously clouded.

Remember that post Lehman collapse decline in global energy prices, we had seen a sharp reversal from mid 2009. This occurred without any material improvement in global economic conditions. Therefore, a 20% rise in energy price scenario may not be entirely hypothetical.

It is therefore critical to examine the global energy market trends and make a realistic assessment about how sustainable could the current energy prices be.

Another factor that needs to be evaluated is whether global deflationary conditions are really good for Indian economy or these just provide a temporary feel good in terms of lower import bill.

Many commentators and analysts are relying on the "luck" of PM Narendra Modi for continuous improvement in economic conditions. I see their point. But my astrologer suggests that PM is likely to hit a rough patch in 2015.

...more on this tomorrow

Monday, October 13, 2014

Some random thoughts

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

Frisson (n)

A sudden, passing sensation of excitement; a shudder of emotion; thrill

(Source: Dictionary.com)

Teaser for the day

"57% of Mumbai citizens surveyed say our MLAs are corrupt."

This reflects upon whom?

Some random thoughts

Nobel prize

"You don't need to wear a patch on your arm to have honor", Lt. Kaffee (Tom Cruise) told marine LC Harold Dawson (Wolfgang Bodison) in the last sequence of popular 1992 Hollywood drama "A Few Good Men".

Two gentlemen Kailash Satyarthi and K. Radhakrishnan have made India and all Indians feel proud in past two weeks. These two have certainly inspired millions of youth and children to pursue the path of justice and excellence.

I have still not heard any voice asking Bharat Ratna for them. I will indeed not be surprised if a large majority of our politicians and studio experts, who had a rather cacophonous debate on the subject few months back, had never heard about them before their recent accomplishments.

I am also confident that their exist thousands of more similar silent achievers who do not need any medal in recognition of their services to the society. It is the society which honors itself by recognizing their effort. Looking back at the quality of people our government/society has recognized in past couple of decades reflects poorly on us, in my view.

State elections

Many readers have asked why have I not written anything on the two important state elections scheduled to be held this week. Perhaps my extensive coverage of last general elections has conditioned their expectations.

I feel that these two state elections are just a continuation of the political trend that began to take shape four years ago and got firmly established with the May 2014 general elections. I do not see any change in that trend. I see a decisive mandate against agenda of crony socialism and divisiveness.

I have not traveled to Maharashtra recently. But from my discussion with people on the ground there I understand that Shiv Sena will be the biggest loser in these elections and BJP will be a clear winner.

Insofar as Haryana is concerned, I did make couple of trips to the state in past three weeks. I could see women and youth voters breaking away from traditional caste and personality driven politics.

Contrary to most opinion polls, I feel INLD will only get support of 50+yrs old Devi Lal loyalists and some stray youth. Kuldeep Bishnoi, Vinod Sharma, Gopal Kanda etc. may be relevant only in 5-7 constituencies. It is mostly between Congress and BJP, with BJP having an edge there also.

I am also not surprised to see Akali Dal and JDU putting their weight behind Chautala's INLD. These relatively stronger regional parties need to find some common ground to create a viable national alliance against Modi led BJP.

However, I still feel (see here) that most degenerated socialist would get extinct in next couple of decade and all well meaning socialists would congregate under Congress umbrella to make it a right vs. left politics in the country.

Friday, October 10, 2014

Power of denominator

Thought for the day

”The lack of money is the root of all evil."

- Mark Twain (American, 1835-1910)

Word for the day

Concomitant (Adj)

Accompanying; attendant; occurring or existing concurrently.

(Source: Dictionary.com)

Teaser for the day

I heard Modi implicitly claiming in an election rally that for the first time in the entire history of Bharat because of him the world community has recognized India as a force to reckon with.

Do RSS and other Hindu nationalist organizations accept this?

Have not we always believed that Bharat had been a world leader since the beginning of human civilization?

Power of denominator

My father once explained me the formula of happiness. He said, "your happiness is equal to your income divided by your needs. If your needs are zero, your happiness is infinite and if your needs are infinite, your happiness is zero, notwithstanding whatever is your income.

The problem with most people is that they focus only on enhancing the numerator (income in this case), which is completely irrelevant if you leave the denominator (in this case needs) uncontrolled. The better way to control problems is to focus on denominator, while keeping an eye on the numerator.

Applying this formula to the current economic conditions provides some interesting insights for the managers of the economy. For example consider the following:

The headline employment data in U.S. has shown steady improvement in past many months. The current reported unemployment rate is down to about 5.9% from post Lehman collapse period high of close to 10%. This sounds great at once. But how do we explain the struggle with low inflation, poor wage growth, slow household consumption growth, and higher number of temporary and part time workers, more people living off food stamps and rising stress on state and local authority finances.

I feel it will be useful to evaluate the denominator used for unemployment rate, i.e., the total number of workers offering themselves for work. Data suggests that labor force participation rate remains 3 percentage points lower than before the crisis and part-time employment remains high. A whole generation of labor might have become redundant in past 7years due to technology advancement and closure of many traditional businesses. These people may now be dependant on the State for their food and healthcare. Some of them might take up petty part-time jobs. But this does not restore their purchasing power to pre-crisis level.

Similarly, while talking about the growth rate of Indian economy, most discussions and arguments are focused on the rate of real GDP growth over previous corresponding period.

This growth number certainly has a statistical importance. But for most of the people, including me, the more important number is the absolute amount of per capita real national income in general and my actual real income in particular.

This real GDP growth in percentage terms will have little meaning if the base or the denominator is very low (which is the case at present) or it is not adjusted for the population growth or the real household inflation. A 5% real GDP growth with 2% population growth would mean just 3% growth in per capita income. This is not likely to cause any material improvement in my lifestyle. Especially when it is deflated by WPI and not the household inflation.

The denominator in our case, viz., population, household inflation and lower number for previous periods are too powerful for the official 6% real GDP growth to have any material impact on my lifestyle. Politicians and corporate though may have a reason to cheer!

Thursday, October 9, 2014

It's windy, wet and depressing out there

Thought for the day

”All generalizations are false, including this one."

- Mark Twain (American, 1835-1910)

Word for the day

Foremost (Adj, Adv)

First in place, order, rank, etc.

(Source: Dictionary.com)

Teaser for the day

Lalu Prasad Yadav was given bail after 10months. So may be the case with J. Jayalalithaa.

So what is the law here?

Should we have a definite law for bail in different cases, or it should continue to be a matter of discretion of the presiding judge?

It's windy, wet and depressing out there

The weather in global markets has suddenly turned grey. The sunshine has disappeared. It's all windy and wet out there. The chill is not biting yet.

The Absolute Return Letter for the month of October puts the mood succinctly, and I take liberty to quote - "When I look at the world passing by outside my window, there is little doubt in my mind that the world is not as safe today as it was six months ago. For starters we have just had a very important referendum in Scotland. We now know the outcome but not yet the full implications. In about 3 years – unless Labour regains

the control of the UK parliament – we will have an even more important referendum in the UK (more important economically if not emotionally) on the future relationship between the UK and the EU.

In the meantime, Putin and his cronies have played a very dangerous game in Ukraine. This is his third war, following armed conflicts with both Chechnya and Georgia, and the signs are that he is not going to walk away quietly. Even without Putin’s (outright) involvement, we have armed conflicts and new terror threats in many countries at present. Libya, Syria, Iraq, Sudan and Israel/Palestine to name a few.

In Europe, the economic recovery is limited to a handful of countries and the ECB has been forced to not only prolong but also intensify its de facto QE programme. The European powerhouse of yesteryear, Germany, looks surprisingly vulnerable and Italy is not in a good state either. The combination of almost zero inflation and high national debt, as in the case of Italy, is a bad one."

Many other are echoing the same sentiments. Some like Stephen King even going to the extent of calling the situation akin to 1984 where war was a constant thing.

Analysts at Brookings find that "The economic recovery in many advanced economies is stalling and growth in emerging markets seems to be losing its momentum, according to the latest TIGER (Tracking Indexes for the Global Economic Recovery) update. The U.S. is now the sole major economy still showing signs of strength."

The latest release of TIGER (Brookings-FT Tracking Indices for the Global Economic Recovery) paints a grim picture. The world economy is in a parlous state, with just a couple of bright spots discernible through the gloom.

The global economic recovery has stalled and become unbalanced, with the U.S. now the sole major economy still showing signs of strength. Growth in China and many other major emerging markets seems to be losing momentum. The world economy is now being powered along essentially by one engine, with the U.S. business cycle at least temporarily delinking from the rest of the world. (read more detail here)

Indian economy has shown signs of stability, though at a much below potential level of growth. Accordingly, this oasis has received significant attention from the yield hungry global investors.

The mute point is could India and US sustain their outperformance in a world that is under serious turmoil? If yes, for how long? I will discuss this in more detail later.

Wednesday, October 8, 2014

My "truth" not the same as yours

Thought for the day

”To succeed in life, you need two things: ignorance and confidence."

- Mark Twain (American, 1835-1910)

Word for the day

Supplant (trn verb)

To take the place of (another), especially through intrigue or underhanded tactics; as, a rival supplants another.

(Source: Dictionary.com)

Teaser for the day

Congress in catch-22 over the issue "whether it carries a national legacy or its legacy is limited to the Party itself."

If Gandhi, Nehru, Patel, Azad were national leaders then any Indian can claim their legacy. If they were just Congress leaders, what legacy is there to claim?

My "truth" not the same as yours

I believe this world is like a prism. You see different pictures, colors and hues depending upon from which angle you are viewing the world and in what light you are viewing. Therefore, while all views and colors are equally valid, your "truth" is always what you see from the point you are standing at a given point in time and under the current light.

In past few years inflation has been the driving force of RBI's monetary policy. Both Gov. Subba Rao and Gov. Raghuram Rajan have consistently emphasized on perils of higher inflation. In his recent statements Gov. Rajan appeared very firm and committed in his fight against inflation.

I spoke to 10 people from various sections of society yesterday to understand how inflation affects their lives. To my surprise, all of them had different perception about inflation. Certainly they all view the issue from their own angle and under the light of their own circumstances.

My problem is under such conditions what is the relevance of RBI's fight against inflation? From my interaction with people and experience of travelling across the country I understand that through tight monetary policy only a small part of the problem could be handled. The development, fiscal, monetary authorities may need to work in tandem to provide a holistic solution to stabilize the prices. The following are the few pertinent points to consider in this context.

(a) For almost half the population, primarily living in rural areas, food inflation may not be a matter of serious concern. This section mostly survives on grain based nutrition and obtains their staple ration through PDS or sustenance farming. Healthcare, agri input, and to some extent transportation inflation is a matter of serious concern for them. Effective implementation of food security, better connectivity, drinking water, sanitation and primary healthcare close to home would provide material comfort to this section of the society.

(b) Urban, semi-urban households suffer from a variety of inflation. Prominent amongst these are education, health, energy, transportation, communication, rental, protein, fruit and vegetable. The political rhetoric and central banker's focus exclude many of these critical elements in their fight against inflation. Better public health, education and transport services, energy efficiency, affordable housing, and better employment opportunities closer to home would be a more suitable solution here.

(c) Debt laden infra and realty developers are more concerned with inflated cost of capital and wage inflation. Energy and transportation cost also bothers them. Better execution standards, simpler administrative procedures, automation, good corporate governance structure, stricter compliance norms and vibrant retail debt market could alleviate many problems for this sector.

We need to appreciate that maintaining the negative real rates for households (household inflation minus term deposit rate) for a long period is the biggest scam perpetrated on the poor people of this country. The inflation tax, as I call it, paid by poor and middle class savers for cheaper financing of “crony socialism” and unscrupulous businessmen, has after all caused serious damage to the basic fundamentals of the Indian economy.

Tuesday, October 7, 2014

Some catching up

Thought for the day

”It is better to keep your mouth closed and let people think you are a fool than to open it and remove all doubt."

- Mark Twain (American, 1835-1910)

Word for the day

Stoic (n)

Not affected by passion; indifferent to pleasure or pain, joy or grief.

(Source: Dictionary.com)

Teaser for the day

Should the government enforce a mandatory "Annual Cleanliness Certification" for all residential areas (urban and rural). All elected representatives (Corporator/Panchayat member, MLA, MP etc, of the areas should be collectively responsible for obtaining the certificate from the "National Cleanliness Authority of India".

Some catching up

After having a great holiday in panoramic Himachal Pradesh, I am back to work. I have spent past two days catching up with the events of past ten days. It appears to me that last week was quite eventful in terms of news flow. Though I could not find little material that about which I can say authentically that "I missed it", there are few things worth taking note of.

In particular I find the following event noteworthy as these could have long term impact on general economic environment of the country and therefore may influence the investment strategy.

(a) Law of the land caught up with the mighty Ms. J. Jayalalithaa. She is the third tall leader after Lalu Prasad Yadav and O. P. Chautala to have been sentenced in a corruption case. Though Mr. Chautala has shown brazen contempt for the law last week, I am sure he will regret it, much like Sahara group chief Subrata Roy, in days to come.

(b) The prime minister Narendra Modi made most of his elusive US VISA by staging a grand show at famous Madison Square Garden of New York city. A typical Indian shown organized by the local Indian community seems to have impressed many US lawmakers. May be many of them will want to emulate Modi's campaigning style for their forthcoming elections. PM also seems to have promised a lot to global businessmen in terms of the quality and length of "Red Carpet" waiting for them on Indian shores.

I guess they take some time in formulating their fresh India plans. A hurried visit may compound their disappointment.

(c) After Sardar Patel, BJP and RSS have sought to appropriate legacy of Mahatma Gandhi. This is an auspicious sign for the socio-economic structure of the country. I have been advocating since long that salvation for Indian economy lies only in Gandhian economic thoughts. (For example, see here).

Besides, the attempt to mainstream RSS is also approvable. In my view, it is akin to listing of a PSU. The board who is used to work in surreptitious ways, suddenly becomes transparent and accountable to public and open to media scrutiny. The content of the supremo Mohan Bhagwat's RSS establishment day's speech only advocated secularism, tolerance, nationalism and inclusiveness.

(d) The PM Modi made yet another serious attempt to move up the political ladder. Rising above the image of a protagonist of free market and business interests, he sought to don the robe of a Lok Nayak. A success in this endeavor could potentially accelerate India's socio-economic development exponentially.

(e) Hong Kong students scared the mighty Chinese regime by putting up a spirited demonstration. In my view, we shall see far reaching impact of this resistance on Chinese administrative and governance structure.

(f) Commodities' world witnessed turmoil with oil, metals, food, rubber all taking a serious plunge. Equities corrected slightly, while USD surged.

At the end I would advice tourists to Himachal Pradesh to avoid Shimla, a city having 1000x more people & vehicles than it is designed to handle.

Friday, September 26, 2014

Consumers to lead Nifty beyond 10k mark

Thought for the day

”Some say the world will end in fire, some say in ice."

- Robert Frost (American, 1874-1963)

Word for the day

Defenestrate (Trn verb)

To throw out of a window.

(Source: Dictionary.com)

Teaser for the day

I said "Bharat Ratana for K. Radhakrishnan"!

Twitratti said "Who's he?"

Consumers to lead Nifty beyond 10k mark

In past few weeks some reputable global investment Gurus have joined chorus with numerous analysts and strategists in pronouncing secular bull market for Indian equities. India is thus gradually becoming a consensus overweight in global portfolios.

I am also putting up in the same camp, but finding it difficult to adjust with the cacophony. I often find the arguments supporting the "secular bull market" incongruent, incomprehensible and frenzied. I also see the dissonance in the actions of bull market proponents insofar as the construction of portfolios are concerned.

In my experience, a secular bull market invariably sprouts from grave of the previous bull market. It therefore needs to have new themes, players, and business models.

The last bull market in Indian equities was primarily based on large capex predicated on availability of easy and cheap credit. That bull market ended with collapse of global credit market in 2008-09. Since then little has changed. To the contrary, (a) the domestic credit cycle has worsened materially and (b) global credit markets are now preparing for the transition to tighter money regime that would be ushered by US Federal Reserve raising policy rates, may be as early as summer of 2015.

It therefore sounds counterintuitive to me to assume that a fresh secular market could be build again on themes like large capex and credit.

This brings us to the most natural theme for Indian market, i.e., 1.3bn consumers.

It is in fact these consumers who are keeping Indian economy and therefore markets afloat since 2009. Of course, the global consumers have also contributed their pennies towards this theme. So we have (a) domestic consumption plays like consumer staples, durables and services like e-commerce, media & entertainment, consumer credit etc. and (b) global consumption plays like healthcare and ITeS doing exceedingly well in the markets. On the sideline, lower global commodity prices have played their role.

The dissonance here is that this space is universally acknowledged as highly overvalued and closer to bubble territory. Therefore no one is willing to bet big with high conviction on this theme. On the other hand the capex or the popularly called "cyclicals" theme is not working and in my view, not likely to work in near term.

The dilemma thus I see in the camp is that people are invested in the right theme, i.e., consumption, but they cannot advocate this for the fear of big market correction in near term; whereas they lack conviction in the theme they are advocating, i.e., "cyclicals".

In strict technical terms, I feel the preliminary leg of the bull market that began in September 2013 is over. Nifty must correct to 7450-7620 range and consolidate there for few months. The low point of the correction could be 7170. The second leg of bull market should see Nifty closing above 10800 in the following 22months. A big bubble it will be. But ain't that the case always?

Happy Holidays!

Next post of Investor's Diary will be published on 7th October 2014

Thursday, September 25, 2014

New jargon on the street

Thought for the day

”The woods are lovely, dark and deep. But I have promises to keep, and miles to go before I sleep."

- Robert Frost (American, 1874-1963)

Word for the day

Malversation (n)

Misconduct, corruption, or extortion in public office.

(Source: Dictionary.com)

Teaser for the day

After telecom licenses, coal blocks, should SC look at cases of large land allotment also?

New jargon on the street

I had the most uneventful visit to India's financial capital early this week. I met some large investors, business consultants, equity analysts, wealth managers and businessmen.

Despite a stupendous run in the stock market on the back of stable macros, political stability not seen in past three decades, improving US economy, huge foreign flows, return of domestic risk appetite after six long years, super success of couple of IPOs, I found the mood on the street rather underwhelming. The Euphoria seen during the interactions early this summer had given way to suspicion and confusion.

Though hope still survives and there is no major disbelief, the certainty of "Good Times" in immediate term is widely doubted.

I learned some latest jargon on the street, i.e., "Quality Bubble", "Power Consumer" and "I of the BRICS".

Few things in particular I find pertinent to share with my readers.

· Quality bubble is a popular term for the crowded trade in high quality stocks that has led the valuations to cross over to bubble territory. This is probably first time that Indian equity markets are witnessing beginning of an economic and therefore market cycle beginning with such high valuations in quality stocks. Usually this happens at much later stage in the bull market.

The worrisome part is that nobody is showing any willingness to go down on the quality ladder and look at the relatively cheaper peers.

· There appears to be a consensus that availability of electricity is going to improve substantially in next 2-3years. The power industry consultant I met confirmed that while PLF at thermal plants may substantially improve in next 12-15months, and substantial wind and solar capacities will likely become operational in next 24-48 months. The market has sensed this trend. Most electrical appliance manufacturers have seen their market value rising 2-4x in past few months. No one is yet betting on power producers or capital equipment suppliers.

· In past one year India has decoupled from its BRICS peers in terms of macro improvement. With EU, Japan and most of Asia not looking great, India is becoming a center of hope (outside USA) for investors.

· The cyclical rally that was expected to gain momentum after unexpected election results in May'14 has completely fizzled out. With industry leaders like DLF, BHEL, JP Associates, SBI, and L&T etc. giving away all the gains seen in past few months. The exporters (IT, Pharma and Auto) and consumers have led the rally so far. They now appear tired.

· The derivative traders are frustrated by record low implied volatility.

The market participants and observers are therefore perplexed about the next market move. I will share my take on this tomorrow.