Vijay Kumar Gaba

Monday, November 10, 2014

Something is amiss

Thought for the day

"From the solemn gloom of the temple children run out to sit in the dust, God watches them play and forgets the priest."

- Rabindranath Tagore (Indian, 1861-1941)

Word for the day

Kickshaw (n)

A tidbit or delicacy, especially one served as an appetizer or hors d'oeuvre.

(Source: Dictionary.com)

Teaser for the day

Just imagine Congress Party wins the Delhi assembly elections!

Many stalwarts, who have nothing to do, and cannot even enter Rajya Sabha, are in a tussle to become Chief Minister.

Poor Mr. Lovely who fought really hard to win the election is left alone to live another day.

Something is amiss

The results of recently concluded US congressional elections appear to have surprised many. The global media is witnessing intense discussion as to reasons and implications of the popular verdict that may see President Barack Obama reduced to a lame duck during rest of his tenure.

As the data would suggest US economy seems to be doing pretty well. Energy cost has fallen materially. Unemployment level has fallen to pre-crisis level. Fiscal condition has improved. Economic is back on its feet as stimulus stands withdrawn and growth is picking up. Foot soldiers are back from battlefields in Iraq and Afghanistan. Opponents like Russia, Libya, Cuba, Iran, Syria etc are weak in their knees.

Why the popular sentiment is so much against the President and his Democrat colleagues?

The answer perhaps lies in the Fed Chairman Janet Yellen's recent remarks about rising socio-economic inequalities in the US. “It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority,” said Yellen during an Oct. 17 speech at the Federal Reserve Bank of Boston. “I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity.”

This also has a lesson for the incumbent government in India. Any effort to achieve 8% growth would be meaningless if it is achieved without participation of the bottom 50% of the population. Focusing too much on the top 5% is perilous - both economically and politically. A deeper study of the 2004 loss of NDA-I and TDP, despite huge popularity of Atal Bihari Vajpayee and N. Chandrababu Naidu respectively, would provide useful clues.

Back home, the financial markets are suggesting a serious conundrum for the government and RBI.

RBI has conducted large reverse repo deals of Rs600bn and OMO selling of Rs100bn. Despite that benchmark 10yr yields have fallen below 8.2%. This large liquidity in the traditionally busy season when seen with the consistently weak PMI, IIP and services sector growth data is worrisome. The 2QFY15 corporate numbers are also suggesting lack of demand across sectors, regions and sections.

Under these circumstances lower inflation may not be a good sign, as it highlights the total lack of pricing power in the economy. In my view, it is too early to assume sustainability of low energy prices over a longer period. Hence, any hasty monetary policy decision based on lower inflation and lower energy prices may prove to be ineffective or even counterproductive.

Populism aside, given the material fall in most competing currencies and slowing demand in traditional export markets, there might be a need to maintain USD/INR at current or even slightly weaker levels to keep our exports competitive. Expected rise in flow post BoJ stimulus would not make things easier either.

Sunday, November 2, 2014

9K on Nifty - I'll pass; you take it, if you must

Thought for the day

"Clouds come floating into my life, no longer to carry rain or usher storm, but to add color to my sunset sky."

- Rabindranath Tagore (Indian, 1861-1941)

Word for the day

Crapehanger(n)

A person who sees the gloomy side of things; pessimist.

(Source: Dictionary.com)

Teaser for the day

Most left leaning intellectuals were found searching for "substance" in PM's Man ki Baat.

Isn't it paradoxical?

Because the King talking to his subjects only about welfare schemes and money is very feudal and burgeon.

9K on Nifty - I'll pass; you take it, if you must

The global markets are once again on a high dose of steroid. As feared, Bank of Japan has undertaken yet another "whatever it takes" type of adventure. The immediate repercussions are (a) "risk on" trade gets more legs; (b) short sellers get squeezed out; (c) Yen weakens to coax main competitors Korea and China to follow the suit and make effort to weaken their currency triggering a currency war; (d) USD strengthens and therefore deflationary pressures on developed economies exacerbate and (e) ECB adds to the stimulus making US tapering look irrelevant in global liquidity context.

However, the midterm implications could be far worse than 2008-09 collapse.

Remember, this stimulus is not USD liquidity. This may conversely lead to massive USD demand at a time when US fiscal and current account deficits are shrinking and USD printing presses are taking some time off after working 24X7 for five years. This means USD may strengthened faster and in greater measures than anticipated earlier, making life painful for all emerging markets who are deeply indebted by dollar denominate debts.

Commodity world is staring at a deep abyss as the global consumption is showing no sign of turnaround. Chinese, South and East Asian, European, Indian, Latin American and even Middle East factories are running much below their rated capacities. This stimulus is not likely to change much on these grounds. On the other hand it may actually pressurize commodity producers to lower their local currency prices to match the gain in USD.

Watch for widespread losses and rising unemployment, stress and unrest in major producers like Australia, Canada, South Africa, Russia, Brazil, Chile etc.

A substantially cheaper Yen could also reignite geo-political rivalry between old foes Korea, China and Japan.

As per a Reuters report, the data this week data from both sides of the Atlantic will give clues in the coming week on just how bad the euro zone economy is and just how sustainable is its U.S. counterpart.

European Central Bank meets to decide on monetary policy and a new slate of economic forecasts and the United States will release its influential monthly jobs data.

A negative reading may precipitate ECB stimulus and softening of US rate hawks. The equity bulls will take full charge. The bond bears on the other hand will have to spend cold nights with their accountants to assess the massive losses inflicted upon them. In my view, their losses will be much more than what they might have earned in 2009-2011 by betting on European bonds.

And guess who will be having the last laugh? Of course it will be the mighty US Federal Reserve, who bought all the bonds that came its way in past 3years. It might very well end up making much more money than what people thought it would have sank in saving US financial markets.

Coming to business, I am not too excited about the market rally in past couple of weeks. I would stick to the plan, looking beyond 2015.

Friday, October 31, 2014

QE is dead, long live QE

Thought for the day

"The most common lie is that which one lies to himself; lying to others is relatively an exception."

- Friedrich Nietzsche (German, 1844-1900)

Word for the day

Indignant (adj)

Feeling, characterized by, or expressing strong displeasure at something considered unjust, offensive, insulting, or base:

(Source: Dictionary.com)

Teaser for the day

Does our Constitution allows me the freedom to express my views on how women, children or men should dress, so long I am not imposing my views on anyone including my family?

QE is dead, long live QE

US Federal Reserve (The Fed) finally brought the curtains down on its two year old bond buying program, popularly known as "QE3", being the third round of quantitative easing post Lehman collapse in early winter of 2008. The gradual withdrawal ("taper") of the US$85bn a month buying program had started early this year.

The markets have appeared to taken the event rather with some relief. Remember, the talk of tapering and fear of potential consequences had caused substantial volatility in global markets last year.

I find it pertinent to reproduce the farewell note written by my favorite Bob McTeer for readers benefit. Trust me, few could have done this job better.

"I retired from the Fed on November 4, 2004, which will be 10 years ago in 6 days. At 8 AM tomorrow, I’m scheduled to give a speech on the economy after which I’ll have to give a defense of Quantitive Easing.

Texas audiences are polite, but they know deep in their bones that there is (was) something not quite right about QE. Their doubts have something to do with the impropriety of “printing money” even if doing so seems not to have turned out too badly. I’ve tried and tried to explain that there has been very little money printing during QE, and that is why the dire consequences of hyper-inflation, a collapse of the dollar, sky-high interest rates, and gold through the roof have not taken place. Unfortunately, it’s also the main reason that QE has not stimulated the economy any more than it has.

But nobody seems to believe me. They are deeply invested in the notion of money printing. They don’t want to hear that the Fed has been “printing” bank reserves and that banks have held onto large amount of those reserves as excess reserves without using them fully to fund new loans and investments and thus unleash the money multiplier. I realize I will never win the debate because everyone calls it an “experiment” and won’t let the jury come in until the experiment ends. As long as I’m leading on points, the experiment isn’t over.

Many critics still expect to be right about the dire consequences—just you wait. Well, I have some bad news for them. Growth in the M1 and M2 measures of the money supply has actually slowed over the past year; so, we aren’t on the verge of an inflationary blowout. QE is ending quietly.

Not that I’ve been a big fan of QE. I was when it started around November 2008. Chairman Bernanke’s improvisations saved our cookies back then. Sometime between then and now, the economy was probably strong enough to survive an earlier phase-out or taper, but every time one Q was about to end the economy swooned and we got another one. Following along one meeting to the next, I remained supportive, but, looking back on it, I find it hard to imagine that it lasted so long. Good riddance.

I do find it amusing that many of the early critics of QE are now faulting the ECB for not getting into the game earlier. I do dread the inanity of trying to guess in the next few FOMC meetings whether the phrase “considerable time” will survive and just how long is a considerable time anyway. Don’t forget that Chair Yellen following the previous FOMC meeting said that considerable time had nothing to do with time."

Thursday, October 30, 2014

Conventional wisdom

Thought for the day

"We hear only those questions for which we are in a position to find answers."

- Friedrich Nietzsche (German, 1844-1900)

Word for the day

incommunicado (adv or adj)

Without the means or right to communicate.

(Source: Dictionary.com)

Teaser for the day

The color of money is never black.

Money in fact has no color of its own.

It usually acquires the color of hand holding it.

Conventional wisdom

I have been insisting for past many months, rather annoyingly to some, that given the uncertainties that underscore the present global financial and macroeconomic conditions, it is critical to anticipate and understand the risks – evident, potential and unforeseen; and calibrate the investment strategy and portfolios accordingly, without losing the sight of the opportunity waiting on the horizon to be seized.

"Easier said than done" - yes it is.

Nonetheless I would like to offer some tips.

Be conventional

The current market rally started last summer with change in leadership at RBI. The event coincided with the government taking a series of measures to control the worsening balance of payment, inflation and fiscal balance conditions. Some measures were also taken to stabilize the rising stress in the financial system.

Most of these measures succeeded in achieving their immediate objectives. Consequently, global investors reposed faith in Indian markets. However, it took a change in government for the domestic investors to come back to the markets.

The market rally since last summer however has many peculiarities. For example, the rally was a very narrow one - confined largely to the stocks of companies with global linkages. Subsidiaries of global corporations, domestic companies with sizable global presence, and exporters were prime target of the buyers.

This group of stocks were given an unconventional and unsubstantiated nomenclature, viz., "quality". The traditional classifications like "growth", "values", "defensive", and "cyclical" etc. were ignored. The conventional criteria like valuations, growth outlook were also ignored in many cases.

The consequence, mostly inevitable, is a price bubble as per the conventional valuation norms, and a seriously crowded ownership.

A large part of my fear is emanating from this peculiar situation. Many of these stocks could correct or underperform in substantial measure (a) in case a global risk off is triggered due to any global liquidity or solvency event or (b) a risk on is triggered in domestic market due to pick up in investment and consumption activities.

In my view, therefore, it is time to seriously consider and calibrate investment strategy to the conventional theories - valuation, growth and earnings momentum. I believe many outperformers of past 13months may fail the test and warrant an immediate exit.

It is pertinent to believe that the bull market in Indian equity market is yet to commence. What we have seen in past 13months is just influx of few dollars chasing yield arbitrage opportunities.

...to continue tomorrow

Wednesday, October 29, 2014

Half empty or half full - II

Thought for the day

”Whoever fights monsters should see to it that in the process he does not become a monster. And if you gaze long enough into an abyss, the abyss will gaze back into you."

- Friedrich Nietzsche (German, 1844-1900)

Word for the day

Odontoid (adj)

Of or resembling a tooth.

(Source: Dictionary.com)

Teaser for the day

If your right eye causes you to stumble, gouge it out and throw it away. It is better for you to lose one part of your body than for your whole body to be thrown into hell. And if your right hand causes you to stumble, cut it off and throw it away. It is better for you to lose one part of your body than for your whole body to go into hell. (Mathew 5:29-30, New testament)

Half empty or half full - II

...continuing from yesterday

The domestic environment appears reasonably stable at present. Macro indicators are showing signs of bottoming out. Especially, fiscal deficit and inflation numbers, two major worries of global investors, appear steady and under control. BoP situation, though not comfortable, does not sound precarious. Currency and rates are also stable and are expected to show some positive momentum in months to come.

The business and investor confidence has definitely improved in past few months, especially since May'14 election results. Consequently flows to the risk assets, especially equities, have improved materially.

The government appears moving on many problem areas. Hope is that many investment bottlenecks might get removed in next 12months. There is material evidence to suggest that the financial stress may ease in next 12months due to legislative and administrative efforts clearing hurdles in recommencing the work on stuck projects.

There are good chances that the investment and credit demand may bottom out soon and begin to look up. Though currently it is struggling at cycle low levels.

This feel good about domestic economy juxtaposed to fear of Europe running out of option, Japan failing to take off and China's hard landing present the dilemma I suggested yesterday.

Despite all the sentimental positivity, the fact remains that on day to day basis Indian markets are susceptible to high volatility caused by sudden infusion/withdrawal of funds by global investors.

So far this year FIIs have pumped about US$35bn in Indian financial markets. Around 60% of this money has come in Indian debt and 40% in equities. Going by past experience (2009) selling even to the extent of US$10bn in a span of 2months could cause havoc in equity, debt and currency markets.

Such situation is not totally unfathomable.

Given that most emerging markets are fundamentally much less resilient at this point in time, as compared to 2008-09, subsequent EM outperformance as a class may not occur this time.

India, this morning looks poised to do relatively better in case of a global slowdown and consequent risk off, notwithstanding the volatile correction in the market in the early phase.

However, this hope is predicated on the optimism that the new government will be able to put the economy back on track in next few months, before the global contagion, if any, reaches the Indian shores.

I am personally inclined to believe that in next 6-9 months we shall see necessary corrections to make economy resilient enough to weather any external shock with minimal damage. The fall in market will therefore, in my view, be an opportunity to buy.

I see the glass definitely half full!

Tuesday, October 28, 2014

It's half full

Thought for the day

”You have your way. I have my way. As for the right way, the correct way, and the only way, it does not exist."

- Friedrich Nietzsche (German, 1844-1900)

Word for the day

Realpolitik (n)

Political realism or practical politics, especially policy based on power rather than on ideals.

(Source: Dictionary.com)

Teaser for the day

RSS is now virtually ruling the country.

Enthused by success in Maharashtra election, MIM is now seeking to spread in UP and Bihar.

Who should worry most?

It's half full

I have no problem in accepting that swinging between greed and fear, the investor in me is little confused. Nothing unusual. Conflicting signals from global and domestic economies and financial markets do often put you in such a quandary.

The indications from the global markets are such that the decoupling of G3 is taking place at rather accelerated pace. The consensus appears to be suggesting that US economy is going to do relatively better; whereas Euro zone and Japan will mostly fail in their struggle with deflationary forces. Strengthening USD will only exacerbate the deflationary pressure as commodity prices take a hit.

Many analysts and economists appear confident (see here) that the end game of Mario Draghi's "whatever it takes" strategy is much closer than it appears. it is only a matter of time before Europe is faced with sovereign defaults and consequent banking crisis.

A few days back Bank of Japan failed to buy the desired amount of bonds, under its QE bond buying program for want of adequate supply. With benchmark yields firmly below 0.5% mark, JPY also looks set to take a plunge along with Euro. The investors are clearly not buying the claims and promises of Shinzo Abe or Mario Draghi's at par value.

Remember, despite the 2008-09 post Lehman fright, the "deleveraging" at global level did never take place. To the contrary, in past three years it has risen rather sharply.

(Reproduced from Mauldin Economics)

This possibility sets global emerging markets, including India, against a potent threat of collapse. The emerging economies, inter alia, face a prospect of substantially weaker currencies, rendering them uncompetitive in global markets, sudden and sharp reversal of capital flows, sustained lower commodity prices (for economies largely dependent on commodity exports).

Remember, all this will likely happen when innovative and unconventional monetary ideas would appear losing popularity and acceptability...to continue

Thursday, October 23, 2014

Investment strategy for Samvat 2071

Markets pregnant with hope

The Vikram Samvat 2071 begins on a positive note. The government appears in full control of the situation. Unlike past five years, no one is talking about paralysis, non-governance and corruption.

The macroeconomic indicators are stable and look poised to improve over next couple of years. Despite poor monsoon, the government has been able to reign food prices within controllable limits.

The measures taken by the incumbent government in past five months indicate clearly that a large part of the problem was perhaps administrative in nature. An assertive leadership with a decisive mandate and progressive strategy ensures that administrative efficiencies are improved materially.

The government so far has taken a non-confrontationist approach to legislative hindrances. However, recent electoral victories should embolden it to pursue legislative agenda aggressively.

No normal delivery this time also

Some women have this tendency of difficult deliveries. They usually face problems like abnormal BP, Swelling on face and feet, elevated level of blood sugar, nausea, piles, etc. and a cesarean section is required for delivering the child. Whereas many others have a perfectly normal pregnancy period and a normal delivery.

My experience is that our Mother India falls in the first category.

The entire development and growth process in India is usually chaotic, unpredictable and painful. Save for some exceptional projects like Mars Mission, the final delivery is often delayed and does not conform to set quality standards.

I do not see any change in the general trend this time also. Nevertheless, I am confident that a normal healthy child will be delivered in time.

In the meantime, the external environment will cause volatility and mood swings. Investors should better factor in these more likely problems in their investment strategy. Energy price volatility may remain a serious concern.

Market outlook

Near Term (3 months)

I expect market to remain volatile in near term. Nifty may move in a large range of 7650-8250 for next three months.

At present ~8000 level the risk reward appear marginally adverse. However any correction below 7850 level could be used to take long trading positions.

I would strongly suggest avoiding any short positions in Indian market over next couple of years.

Short term (3-6 months)

I expect Nifty to remain volatile with a marginal positive bias over next six months period. Global events like European crisis and monetary stimulus would materially influence the day to day market movements.

Domestic events including budget for FY16 would prove to be positive for the market.

Save for a drastic global event like Lehman collapse (not improbable), Nifty should move closer to 8500 on upper side and should not fall below 7420 level.

Strong buying opportunities will emerge closer to 7700 Nifty level.

Mid-term (6-24 months)

I expect Nifty to make a strong positive move over next two year with upper bound at 10800. The risk reward at present from this perspective is positive.

Wednesday, October 22, 2014

An act of desperation

Thought for the day

”In the name of God, stop a moment, cease your work, look around you."

- Leo Tolstoy (Russian, 1828-1910)

Word for the day

Xyst (n)

A garden walk planted with trees.

(Source: Dictionary.com)

Teaser for the day

This question is for all those who talk passionately about nationalism, honesty and governance.

Name the seven sister states of north east, and their respective chief ministers?

Do you know who is Manik Sarkar?

An act of desperation

Despite deep invasion of technology in my normal life, I have still kept the monkey in me alive. I like to do many things in the traditional way. Reading morning newspaper is one of these things. I like to break my fast every morning while reading the latest news from around the country and familiarizing myself with divergent views of various experts. Not to say, I like the aroma of newsprint as much as I like my Darjeeling tea.

However, it had been quite irksome since the traditional Indian festival season started two weeks back. The front page of the newspaper is now placed at 5th or 7th page. First 4-6 pages are cramped with ugly, but I must say alluring, promotion campaigns of retailers and real estate developers.

The sheer intensity of the promotion campaign provoked the little cynic within me. It took me to all major wholesale and retail markets and malls of Delhi in past three days. I thoroughly enjoyed my stroll in the narrow lanes of Sadar Bazar, Chandni Chowk, and adjoining wholesale markets.

But most of the wholesalers did not share my joy. In particular I spend some time with my old friends who sell garments, dry fruits, decorations and lights, toys, sanitaryware, and packing material. I also spent some time at couple of high fashion stores at an upscale mall in South Delhi.

I would like to share the following key points of the feedback I received and things I observed with my readers.

(a) The sales volumes are definitely and substantially lower than past two years. It is not the effect of online shopping. The wholesalers I met cater mostly to rural markets in north and central India. Poor monsoon has impacted the purchasing power in these areas.

(b) The packing material guy tells me that the volumes are almost 10% lower this year despite lower prices. In his experience this should translate into 15% lower consumption demand.

(d) Electrical hardware and sanitaryware demand from retail segment is similar to last year (that was not great in itself). However, demand from realty sector is materially lower.

(e) The festival related demand of decorations, lighting, toys, gifts etc. is 30% lower as compared to past two years.

(f) The Independence Day Sale is still continuing in many malls. Many retailers have re-negotiated their rentals lower, but the electricity and maintenance cost is still high rendering the business mostly unprofitable.

(g) Sweets volumes are down 10-15%. Only a part of this could be attributed to the shift towards confectionary items like chocolates etc.

(h) The average ticket size at jewelery shops is almost 25% lower this year.

(i) The traffic on Delhi roads is thinner and faster as compared to last year.

In light of this I find it hard to swallow the comments of few large retailer in newspaper, suggesting that the sales this Diwali are much better. Moreover, I see the large full page advertisements as an act desperation, the cost of which shall reflect in 3QFY15 numbers.

Tuesday, October 21, 2014

Good times are dawning

Thought for the day

”He never chooses an opinion; he just wears whatever happens to be in style."

- Leo Tolstoy (Russian, 1828-1910)

Word for the day

Ethos (n)

The fundamental character or spirit of a culture; the underlying sentiment that informs the beliefs, customs, or practices of a group or society;.

(Source: Dictionary.com)

Teaser for the day

Major seat contributors for BJP in Haryana"

Robert Vadra - 10 Seats

O. P. Chautala - 10 Seats

AAP - 10 Seats

Dera Sacha Sauda - 10 Seats

Navin Jindal - 3 Seats

Others (including Modi and Amit Shah) - 4 Seats

Good times are dawning

The results of just concluded Maharashtra and Haryana assembly elections have confirmed that the transformation of Indian socio-political order that begun with summer general elections is progressing well.

I have had the annoyance of watching, reading and listening to a variety of analysis over election results in past 48hours. I am sure, many readers of this letter also share my agony.

Considering that the number of TV channels, social media platforms, papers and websites presenting 24hr live analysis and debate over election result has grown manifold in past few years, the number of analysts and commentators has also grown proportionately. This should have logically added to the depth of the discussion and breadth of the views. Unfortunately I do not find this to be the case.

I see most of the celebrated analysts and commentators beating the same old bush, i.e., caste equation and religious preferences etc. This suggests that elite of the Indian society is perhaps totally disconnected with the transforming realities. This also explains the series of defeats which elitist Congress Party has suffered in past 3years particularly.

In my view, the key highlights of the two assembly election results are as follows:

(a) The "AAP effect" has played a major role in BJP's victory, both the states. The youth and women are no longer opinion takers. They are taking their own independent decisions; in some cases just to assert themselves against family domination. Consequently, caste and religious identities are fast diminishing in their political influence.

(b) After Yadav clan in UP, Chautalas, Bishnois, Pawars, Munde etc. have been reasonably successful in recent elections at individual level. This confirms my view that dynasties are an integral part of Indian culture, traditions, history and even religion. It would be unreasonable to expect it not to be part of politics.

(c) The voters are now giving decisive mandate in almost all the elections. I view Maharashtra mandate decisive in favor of NDA. I believe BJP could have got 144+ if they had broken alliance with Shiv Sena in New Delhi, Mumbai (BMC) and other local bodies in Maharashtra.

(d) The Indian politics is acquiring a distinct regional character, as envisaged in our constitution. The regional aspirations and expectations are dominating the political discourse and agenda. Though, Narendra Modi led BJP is trying to give it a national hue, the core of the Union remains in preservation and promotion of the discrete regional identities. BJP's victories in states are predicated on strong regional leaders with distinct local identities. This was the core strength of pre-Indira Congress Party also. It was only the complete centralization of power under Indira Gandhi, that led to emergence of stronger regional parties.

De-centralization of power in politics and within homes, federalization of governing structure, and clear mandate for governance, accountability and transparency - I guess achhe din sach mein anne wale hain (Good times are truly dawning).

Also read:

Mandate 2014: Decisively Transformative

Ganpati is son of Shiva