Vijay Kumar Gaba

Wednesday, January 21, 2015

Make vs. buy

Thought for the day

"Historians are like deaf people who go on answering questions that no one has asked them."

- Leo Tolstoy (Russian,1828-1910)

Word for the day

Afflated (adj)

Having inspiration; inspired

(Source: Dictionary.com)

Teaser for the day

Akar Patel compares Congress Party with Mogul dynasty!

Guess to whom he is being unreasonable!

Make vs. buy

At 7.4%, Chinese economy recorded its lowest rate of expansion in 24years in the year 2014. The consensus amongst global economists appears that the momentum may slow down further in the current year due to cooling property market and stressed financial system. Though the government is trying, through a series of modest stimulus measures, to maintain the economic activities around the current levels, analysts are assigning material probability to a hard landing in China.

Since the Chinese economy has been the most powerful engine of demand in past two decades, the weakness there has naturally spilled into the economies which have been feeding the Chinese demand for commodities - most notably minerals and metals. Economies from Australia, Canada, Chile, Venezuela, Middle East, South and East Africa to Indonesia are struggling with stock piles of commodities and prices are crashing to levels not seen in many years.

This is the background in which India has is reemerging from a decade of hiatus. The incumbent government intends to initiate a manufacturing renaissance. This would essentially need huge investments in building physical infrastructure and rise in aggregate demand for all commodities. The demand starved world is thus naturally exited about India - leadership, economy and markets.

The PM Modi has struck all the right cords so far. His mantra of 3D (democracy, demography and demand) has appealed to global community. The recent utterances of reputable global leaders, economists, policy makers, and investors show that his charisma as "divine intervention" has transcended beyond borders.

The Indian stock markets scaling new highs when most emerging markets appear struggling, indicates the investors' enthusiasm towards Indian assets.

I also share much of their enthusiasm, but with some caution. I believe that transition from a agro economy to industrial economy will be slow and excruciating. Expecting quick results may lead to avoidable disappointment. Please note that:

(a) Most of the claimed "Demand" in India is still "Need". The "capacity to pay" that is quintessential to "Demand" is still low.

(b) The "Democracy" is both the strength and weakness of India in economic context. Unlike China, it is not an easy order here to override sustainability concerns and regional aspirations for faster economic growth. Socio-political consideration would continue to take precedence over pure economic concerns.

(c) The "Demography" is a still a raw strength. Without substantial investment in "gender equality" and "skill development" this resource cannot be exploited fully.

Another point to ponder is with China likely to ebb low for considerable time, should we be looking at exploiting the idle capacities there to our advantage or create redundancies here!

Tuesday, January 20, 2015

Water, oil and PM's 3D

Thought for the day

"The changes in our life must come from the impossibility to live otherwise than according to the demands of our conscience, not from our mental resolution to try a new form of life."

- Leo Tolstoy (Russian,1828-1910)

Word for the day

Daunt (v)

To discourage; lessen the courage of

(Source: Dictionary.com)

Teaser for the day

For BJP, from a distance of 35k feet, Kiran Bedi looks no different from Sakshi Maharaj; semantics apart.

Water, oil and PM's 3D

"Next War will be fought over water" has been a popular dictum since past few decades. While till date the peak oil theory has been challenged seriously and proved wrong time and again, there appears little challenge to the ever looming threat of a global water crisis.

I wonder whether the investors who are sounding so bullish on ONGC, would be equally interested, if not more, if water corporations of the states of UP, Punjab, Bihar, and Maharashtra, which perhaps control the largest amount of country's water resources, are corporatized and make a public offering of their shares!

If you argue that I am comparing apples with oranges, I concede. I believe, water boards develop and distribute a much more precious natural resource and touch more lives in comparison to ONGC. In our country the insatiate demand for safe drinking water is much higher as compared to fossil fuel. We have seen more elections won or lost on the issue of water as compared to fuel. So, water represents the PM Modi's 3D (demand, demography and democracy) much more closely than fossil fuel produced by ONGC.

My point is simple and small. If I feel the state water boards are in a state of junk and make no investment sense, so does ONGC. Though it does provide some interesting trading opportunities which could be availed by professional traders and fund managers who are skillful enough to do that.

A number of thinkers and policy makers shared their views on the present day government at ET Global Business Summit. Almost all sounded positive on the government and bullish on the Indian economy. I found some notes worth saving, for example:

(a) "The government will depend on a partnership with private sector for investment-led growth, but will blend sound economics with political wisdom and repel any greedy corporate effort to grab resources cheap". (The minister for coal, power and renewable energy Piyush Goyal).

(b) "Higher education leads to a slowdown in risk taking. Think of what would have happened to the computer industry had Steve Jobs, Bill Gates, and Larry Ellison stayed in school — they are all college dropouts. These people were made to be entrepreneurs. Had someone like Bill Gates stayed at school would have ended up as a manager, or a consultant. So that is my comment on university education.

On the other hand, school is not just helpful, it is a condition, it is necessary." (Nassim Nicholas Taleb)

(c) "Raising rates will lead to a complete panic by a generation of traders who have not seen interest rates rise before." (Nassim Nicholas Taleb)

These comments should warn the traders who are (a) unreasonably optimistic of companies perceived closer to the government (b) complacent about the rate hike cycle in the USA.

Monday, January 19, 2015

Interesting times

Thought for the day

"In all history there is no war which was not hatched by the governments, the governments alone, independent of the interests of the people, to whom war is always pernicious even when successful."

- Leo Tolstoy (Russian,1828-1910)

Word for the day

Cataract (n)

A great fall of water over a precipice; a large waterfall.

(Source: Dictionary.com)

Teaser for the day

Could Swiss Franc challenge USD supremacy?

Interesting times

The Europe has long been known by the world community for its strong and deep rooted idea of Nationalism. Though with the winding up of large European empires globally, at macro level the idea of nationalism begin to fade post WWII, popular groups advocating strong nation states have never really been absent.

The protagonists who were marginalized with the formation of European Union have found new vigor in financial crisis of 2008. These groups have received material patronage in past 7yeras and have gained prominence.

The global strategy firm Startfor in a recent note highlighted the re-emergence of the forces of nationalism in Europe. The note reads:

"After decades of post-war supranationalism, the Europeans are once again discussing their national identities. The French tried to start a discussion in 2009, when then-President Nicolas Sarkozy launched a public debate on "what it means to be French" — an exercise that degenerated quickly into a discussion of the role of Muslims in the country. The Pegida protests led to similar debates in Germany, a country that for historical reasons feels extremely uncomfortable with the topic but also considers generational change to be breaking old taboos. Pegida-inspired demonstrations will take place in Austria in February, potentially leading to controversy there as well. These debates will not go away in Europe and will force the Europeans to deal with difficult questions that have remained dormant for decades.

At the core of these problems is growing resistance to globalization, understood as the free movement of goods, services and, most important, people. From the Italian shoemaker who cannot compete with cheap Chinese imports to the British factory worker who believes that Polish immigrants are threatening his job, many Europeans believe globalization is a menace to their way of life. The fact that the European Union was built on many of the principles of globalization explains why the bloc is becoming increasingly fragmented and why the promise of a "United States of Europe" probably will never be achieved."

In this background SNB decision to detach Swiss Franc (CHF) from common currency (EUR) is assumes even more significance.

Given that most of the dollar strength could just the other side of deliberate currency weakness in Europe and Japan and currency declines in commodity exporting countries, CHF could emerge as an important balancing factor or even as a serious challenger to the supremacy of USD.

A stronger CHF could also mean review of short gold trade by global commodity traders and hedge funds. The summer vacation travel plans of a multitude of Indian tourists may also warrant some changes.

Of late the valuations of subsidiaries of global corporations listed on Indian stock exchanges have crossed the wire to enter the bubble territory. I shall wait to see how this misadventure terminates - (a) happy ending: delisting at even crazier valuations; (b) sad ending: sudden crash; (c) no ending: drag like HUL during the decade of 2000s.

Excerpts from "Europe Rediscovers Nationalism are republished with permission of Stratfor."

Friday, January 16, 2015

Beyond the cut

Thought for the day

"The little reed, bending to the force of the wind, soon stood upright again when the storm had passed over."

- Aesop (Greek, 620-560BC)

Word for the day

Quagmire (n)

A difficult or precarious position or situation; a predicament.

(Source: Dictionary.com)

Teaser for the day

Kiran (Crane) Bedi as Delhi CM!

Finally I can expect some pavements to walk on!

Beyond the cut

The 'surprise' repo rate reduction by RBI is much more than a cut. In my view, to see it as purely a move in the inflation-growth matrix might be a mistake.

The 25bps rate cut may not have much impact on the cost of borrowing in the near term. For one, the effective rate in the money market are already much lower than the base lending rates of most banks. Secondly, the re-pricing of the existing corporate debt may take much longer than usual two quarters given the stress in collaterals. Nonetheless, another 25bps cut on 3rd February may trigger the necessary correction in debt profile of corporates who relying more on shorter term CPs even for their longer term requirements. The cost of raising debt may therefore also come down a bit.

The more significant signals that I get from the governor's statement are as follows:

(a) The incumbent government is willing to allow institution the necessary independence in decision making. This shall certainly allow in future more scientific data driven action having long term sustainability.

In most developed markets these data driven actions are seen to create the illusion of predictability and control amongst investors; adding to their confidence and risk appetite.

(b) By not intervening aggressively in currency market, RBI has in recent past signaled that it is not averse to importing deflation from places like Europe, China, Japan, Australia, Korea and Latin America. Yesterday's out of turn rate cut may also signal reconsideration on this thought.

(c) By not transmitting a material part of the benefits accruing from crude oil price to consumers, the government has shown resolve towards fiscal consolidation.

RBI has sought to put an end to the debate "whether the government should use the current deflationary environment to boost public investment at the expense of fiscal consolidation".

The governor has made it clear that long term quality fiscal consolidation is non-negotiable. At the same time he is willing to support the steps to overcome supply constraints and assure availability of key inputs such as power, land, minerals and infrastructure through further easing.

The effort to kick start the economy therefore would have to be financed through resources from asset sale, foreign capital and more conducive environment for domestic investment. A good omen for equity markets.

(d) RBI has also exhorted the government to decide expeditiously whether (i) it want to take a confrontation path in the parliament to score political points or first fix the things that do not need legislative intervention; and (ii) it want to stay focused on Bihar (2015), West Bengal (2016) and UP (2017) and promote crony socialism or move forward with its inclusive and faster growth agenda and leave the rest to the voters.

Thursday, January 15, 2015

Is this a bear talking?

Thought for the day

"Beware lest you lose the substance by grasping at the shadow."

- Aesop (Greek, 620-560BC)

Word for the day

Zeitgeist (n)

The spirit of the time; the general intellectual and moral state or temper characteristic of any period of time.

(Source: Dictionary.com)

Teaser for the day

Heard on Rajpath last evening - In 2015 a dozen "famous" personalities will become" infamous"!

Could you name any five?

Is this a bear talking?

In past two days I have received record number of hate mail. After lot of quarrelling with some dear friends, I admit that I am being little too much perceptive & judgmental. And perhaps, as one dear friend and valuable critic suggested, losing the benefits of naiveté.

I could fully appreciate fans of Amir Khan castigating me for my profanity over "PK" (even though I did not make any comment about his acting skills). An apology is due for hurting their sentiments (no pun intended).

However, I sincerely believe that I do not deserve titles like "ultra bear", "anti-Modi", and "communist". I find these imputations rather uncharitable and in need for a due rebuttal.

I have consistently maintained that in my view the interests of stock market in India are incongruent to the interests of the real economy. Given that the wealth effect created by stock market is limited to less than 3% of the population and less than 200 companies have consistently created wealth for shareholders, focusing too much on stock market for policy making purpose is inappropriate; which unfortunately has been the case since 1991. Therefore, I want the focus of economic policies and reforms to move to the rest 97% people.

I am convinced, with 90% workforce earning, consuming, saving and investing, stock market can grow exponentially in no time. Whereas under the current status where less than 10% people are pushing the virtuous wheel of earning, consuming, saving and investing we can cover only as much distance.

I believe that 5% growth in which 90% population participate is much superior and sustainable as compared to 9% growth that benefits only a small section of the society. As per my understanding of economic theory, enabling larger section of people so that they can improve quality of their life without government subsidies and corporate alms is in no way "communist".

Being an eternal optimist and hardcore Bull, I believe that stock market do best when they follow the real economy. Any digression is only perversion.

So when I propagate radical shift in policy direction as against incremental changes being considered by the government, I am actually super bullish on potential of Indian economy and therefore financial market.

By reminding the PM Modi that his mandate is to improve the quality of life for 1.25bn Indians and not just 10% metro and smart city dwellers, I am being his true friend and anti him.

My regular readers know that since 2013, I have been maintaining that any bullishness if Indian equities will come due to domestic factors and most volatility and weakness will be caused by global factors.

Given that global financial markets are likely headed for a "perfect storm" this summer, I am expecting a deeper correction in Indian equities also. This to me will be an opportunity to stock up, even by leveraging. Is this a bear talking?

Wednesday, January 14, 2015

For once, let's go with the bulls

Thought for the day

"Never trust the advice of a man in difficulties."

- Aesop (Greek, 620-560BC)

Word for the day

Comity (n)

A state of mutual harmony, friendship, and respect, especially between or among nations or people; civility.

(Source: Dictionary.com)

Teaser for the day

Taxi, auto, airplane, train, truck, tempo - have you seen any impact of lower fuel prices in any fare/freight?

For once, let's go with the bulls

There is a popular Hindi saying "Jungle mein mor nacha, kisne dekha". It is normally used to convey either of two senses - (a) I do not believe in unverifiable claims; and (b) No achievement is meaningful if not demonstrated publicly.

The critics of the PM Modi have been using this adage in the first sense, to discredit his claims of outstanding and holistic development in Gujarat and achievements of the 8 month old NDA government at the centre. Whereas the PM and his machinery is using it in the second sense to press their claims.

I went to the jungle to see the peacock dancing, and found none. A 55% fall in global crude prices has not caused a penny fall in passenger fare or goods freight rate in any mode of the transport. In fact the fare/freight are little higher in many cases. Moreover, no one is talking about any reduction. For record, I learned that Jamnagar - Mumbai, Lucknow - Delhi, Kolkata - Delhi and Bhubaneswar - Delhi truck freights are now higher as compared to August.

It is widely reported and recognized that there is little improvement in crime rate and corruption. "Ease of doing business" is so far a peacock dancing in the jungle. May be an elite group of tourists on a government sponsored Safari have seen it. Yesterday, I checked with some traders, hawkers, rickshaw pullers, taxi drivers, financial intermediaries, travel agents, shop keepers in Delhi - no one has seen any sign of it yet.

Regardless of all this, I decided to go with the bulls for once. I assume -

(a) Despite strong global and local headwinds the government will achieve its goal of attaining 8% real GDP growth by FY19 when it faces the next election.

(b) Despite serious deflationary pressures globally and consequent financial crisis, Indian corporates will manage a 18% CAGR earnings growth during FY16-FY19.

(c) Despite higher USD and Fed rates, and consequent unwinding of USD carry trade, Foreign flows will remain consistently positive for Indian equities and historical market PE multiple will re-rate by 10% from current 18x to 20x.

With all these assumptions, which certainly look highly optimistic and less likely to materialize, I assess that:

(a) The long term trend economic growth (5% CAGR) in FY19 will still be under 7%, much less than 9% required to generate adequate employment to sustain current savings and consumption rate.

(b) Nifty at ~15K would have returned 12% CAGR during the four year period 2015--2018 almost 70% lower than 2007 5yr CAGR of 41%; though with materially higher risk.

(c) Equities will still be the best asset class, meaning fixed income, real estate and gold which constitute over 85% of household assets, will return less than 10% CAGR, so no visible wealth effect.

In short, by running ahead of Modi government, the market might have already realized much of the gains that would have come through economic recovery during FY16-FY19. Even most optimistic bullish assumption do not show the kind of return seen in 2006-2007.

I am therefore working with expectation of lower return, higher volatility and much higher risk over next four years.

Will talk about near term strategy tomorrow.

Tuesday, January 13, 2015

Whatsapp GIMMs

Thought for the day

"Every truth has two sides; it is as well to look at both, before we commit ourselves to either."

- Aesop (Greek, 620-560BC)

Word for the day

Fritter (v)

To squander or disperse piecemeal; waste little by little (usually followed by away)

(Source: Dictionary.com)

Teaser for the day

Reports suggest Congress party has told Delhi assembly candidates to manage their election expenses from personal resources.

The logical next step would be auctioning of tickets in Bihar, WB and UP assembly elections!

Whatsapp GIMMs

Since announcement of general elections early last year there has been overwhelming media coverage of the random utterances of some leaders who are mostly irrelevant in national picture and often derided as religious fundamentalist in media.

The coverage has become more intense and frivolous in equal measure since the Narendra Modi led NDA government has assumed office.

Without delving into myriad of conspiracy theories discussed with brilliant alacrity at prime time TV and social media, I must admit that it has certainly added another wrinkle on the already tense brows of investors.

To ascertain how much this trend should concern investors I decided to use my Christmas vacation for visiting some key pilgrimages and centers of learning in the states of Madhya Pradesh, Uttar Pradesh and Uttrakhand.

Despite excruciating weather conditions, I was relieved to discover that all hoopla is confined to customary Indian discussion over tea (Chai pe Charcha) and no one is really losing sleep over it. Trust me it has no socio-economic relevance at all.

In my view, the media discussion over the issue of India being in danger of dissipating into a sanctimonious state is nothing more than an extension of guilt inducing morning messages (GIMMs) we receive on our social media accounts, more so on Whatsapp. These messages mock us for not caring enough for our families, elders, friends, society, soldiers, poor, sick, environment, country, et. al., ignoring our health, and falling prey to the hideous designs of MNCs poisoning our food plates etc.

Most of these messages also contain a standard solution for overriding the guilt induced by the message - "make everyone you know also feel guilty by forwarding the message"! We are therefore redeemed of our guilt almost as quickly as we finish reading the message. Of late, of course many users have started ignoring GIMMs altogether.

So I assure the investors and businesses not to worry a bit about this. This changes nothing.

More specifically, I would like to share the following:

(a) The people like Sakshi Maharaj and Sadhavi Niranjan Jyoti have been saying these things since eternity. There is nothing new there. The only thing that has changed is that they are getting national media coverage now because of change in their political status.

In fact, I discovered that both of them have done commendable work for upliftment of the most unprivileged and neglected section of the society. They have worked hard and selflessly for their empowerment and elevation with reasonable degree of success.

The problem as I perceive is the communication and perception gap.

The national media that mostly works from the confines of plush studios in Delhi and Mumbai, perhaps does not fully appreciate the local context and language or does not find it exciting enough for their audience. On the other hand, these parochial leaders who are firmly rooted in their constituencies may not be articulate enough to put their views across to the national audience in a secular manner.

The best and happy part is that leaders' constituency is fully in sync with them. The media's audience is also intelligent enough not to take its frivolities much seriously. The guilt inducing prime time TV discussions are relevant only till the time viewer decides to flip the channel.

(b) Since May 2014 verdict, the competition to get entry into mainstream BJP has intensified multifold. Not only the leaders from the affiliated organizations are now more eager to join mainstream politics, many local leaders of opposition parties are showing interest; and some religious leaders are also keen to gain proximity with the seat of power.

This intensity of competition is prompting a lot of local leaders to use radical means to gain immediate recognition & acceptance with national leadership. I suspect that most miscellaneous agitations, like the one against movie "PK", are strategic moves towards this goal.

Fortunately, scholars and politically indifferent religious leaders (who form 99.9% of the total) do not see issues like "love -Jihad", "PK", "ghar vapsi" etc. as a serious threat to the religion or the State.

(c) In Varanasi, Allahabad, Ujjain, Haridwar & Rishikesh, I could find no buyer amongst youth, children and their parents for Sanskrit as a compulsory subject. The fan club is limited to some elite and mostly redundant. Even Pandas of Haridwar want their children to study English & computers.

I would also like to misuse this opportunity to express my views about the movie "PK", since I was forced to watch it (against my wish), to understand the agitation against the film.

I found the movie a poor work of art. To me it appeared a incoherent collage of Whatsapp GIMMs and jokes with no story. The social message which the makers of the film ostensibly intend to convey is totally uninspiring and cliché.

If the previous film of Mr. Hirani "3 Idiots" was most overrated, "PK" beats that hands down, regardless of the money it collects. The fact that it has earned record money is in itself a justification of the phenomenon this film seeks to denounce, i.e., gullibility of common Indian citizenry. Otherwise, Nirmal Baba, Asaram, Satpal Maharaj et. al. and Indo-Pak love stories have already been filmed and discussed at length in all media. This films brings out nothing new.

Surprisingly, No One protested against Amir Khan (brand ambassador for India Tourism) defacing the wall of historic Red Fort and urinating on it or mocking Bhojpuri language.

I could not understand what the filmmaker wants to convey by suggesting that it is innocuous to steal from people who "dance" in their vehicles.

Insofar as the controversial Lord Shiva depiction is concerned, I would suggest Mr. Hirani to watch the Mahabharat parody in Jane Bhi Do Yarron.

Monday, January 12, 2015

Reflective but not shakin'

Thought for the day

"Our insignificance is often the cause of our safety."

- Aesop (Greek, 620-560BC)

Word for the day

Expatiate (v)

To write at length or in considerable detail.

(Source: Dictionary.com)

Teaser for the day

So much hoopla for Delhi assembly elections!!!

Will someone try examining the viability and profitability of carving out NDMC area as national capital and merging the rest of Delhi into Haryana and giving Chandigarh to Punjab?

Would it help in solving the problems of water, electricity, congestion, and of course cost of governance?

Reflective but not shakin'

"Early in the morning time
Late in the middle of the night
Whenever this chill comes over me
I wanna hug you with all of my might
That's right and I'm sweatin'
Oh, yeah you got me shakin'
Mmm, you got me sweatin'
Ohh, yeah you got me shakin' girl."

-Jack White

It's a nice warm feeling to be back on my writing desk after a hiatus' of little over two weeks.

I note that since Christmas not much has changed in terms of benchmark equity indices; crude and EUR have though broken down. There is a perceptible change in the market context. Investors are certainly much more circumspect today as compared to three weeks ago.

I had expected this to occur in my last note of 2014, but not that soon.

Besides the deterioration in global economy due to factor like deflationary pressures; failure of ECB, BoJ and PoBC in reviving growth through monetary stimuli, and renewed Eurozone integrity concerns, ostensibly some domestic concerns are also bothering investors. In my assessment two major domestic factors are making investors' little jittery.

Firstly, despite successfully projecting a big picture, the incumbent government has so far been rather parsimonious on specifics that would spur the domestic growth especially in a challenging global environment.

Some steps that have been taken, e.g., Land Acquisition & Coal Ordinance and spectrum auction plans do not appear very coherent and therefore have been subject to severe criticism. The encouraging points are very few, the most notable one being progress on PMJDY and GST implementation. The adverse market conditions have also clouded the program to raise resources through PUS equity sales. To make the matter worse, a stronger USD, along with fiscal pressure, is keeping the rate cut outlook slightly clouded.

People who had pinned hopes for material reforms in union budget for FY16 have been earnestly prompted to have a re-think.

Secondly, some voices from government and allied quarters which sound incongruous to the inclusive development agenda of the government have also definitely impacted the investors' sentiments.

Though the government has so far done almost nothing that should raise suspicion of deviation from the committed agenda for faster, sustainable and inclusive economic development, the sundry public utterances and unmindful media bytes are being used to project that the PM Narendra Modi may not be in full control of his government's agenda. Frivolous controversies like the one relating to movie "PK" have perhaps soured the taste a little bit.

I have been often expressing my views on the first factor and it is widely known that I am not sanguine about the prospects of economic growth in near term. Insofar as the second factor is concerned, to me presently it appears a purely political phenomenon with no economic implications.

I actually spent large part of my Christmas vacation visiting some major centers of pilgrimage and religious learning to understand the phenomenon. Tomorrow I would share some interesting learning from this trip. Later this week I would deal with more mundane issues like market directions and trading strategy in the near term.