Vijay Kumar Gaba

Thursday, May 7, 2015

Shivering at 41°C

Thought for the day

"It usually takes me more than three weeks to prepare a good impromptu speech."

- Mark Twain (American, 1835-1910)

Word for the day

Bafflegab (n)

Confusing or generally unintelligible jargon.

(Source: Dictionary.com)

Malice towards none

Being Human!

Shivering at 41°C

The popular commentary may be seeking to associate the recent fall in stocks prices with local issues like retroactive taxation of the past income of certain foreign investors; prospects of a deficient monsoon; legislative logjam; uninspiring corporate performance; etc.

Inarguably these factors are weighing on the investor's sentiments. But focusing only on domestic issues may not be prudent from investment strategy perspective.

There are some distinct signals emerging from global market place indicating that global economy might just be preparing to hit a rough patch. These signals must be sending creepy jitters down many spines.

The people who follow global trade as an indicator of the health of global economy, the picture has become as gloomy as it was during 2008-09.

The global container freight rates have just plummeted in past couple of months to much below the cost of ship operations. The US inventories are piling up. Manufacturing data is worsening in China, EU, India and Japan. Australia has cut the rates to lowest level ever.

Commodities higher, bonds down - preparing for the "Lift"

The markets are clearly showing massive unwinding in short commodities and long bond trade. The correction in equity prices seems to be incidental only. This in my view is in preparation for the US Fed "Lift" expected later this summer.

Chinese bulls are tired

As per recent Bloomberg report - "For Chinese investors with a sense of history, the nation’s world-beating equity rally is looking long overdue for a reversal.

The bull market turned 883 days old on Tuesday, topping China’s previous record by 56 days, after a 119 percent surge in the Shanghai Composite Index since December 2012. Even if the advance is measured from June 2013 -- when the gauge narrowly avoided a bear-market drop of 20 percent -- it’s still the second longest since Chinese bourses opened for trading in 1990.

The rally’s age is concerning in a market notorious for how quickly it can turn from boom to bust: the 194-day average lifespan of Shanghai bull markets is the shortest among the world’s 10 biggest bourses and compares with the 1,625-day mean for the Standard & Poor’s 500 Index since 1965. The Chinese measure lost 4.1 percent on Tuesday as traders sold some of this year’s top-performing shares.

“There’s no need to chase stocks at this level,” said Wei Wei, an analyst at West China Securities Co. in Shanghai. “Lots of stocks are not justified by current prices.”

This is happening despite Monetary stimulus, reform speculation at state-owned companies, record margin trading, and largest ever retail participation."

...as global economy struggles

Indian equities to continue struggling

As I suggested a few days ago (see here), the Indian equities are currently undergoing a normal correction. In this correction Nifty should find the rock between 7860-8096 range.

In this case the benchmark indices should move in a downward sloping channel making a lower top - lower bottom formation over next six months.

The large cap will materially outperform the mid and small cap in this phase.

The probability of a full 20% correction that would end the current bull market looks remote at this point in time. But may need some allowance to be made, should Nifty closes below 7860 in next 10 trading sessions.

Trivia

Received the following message form a dear friend and regular reader:

"Was reading yesterday's ET - feedback from industry in Modi's one year in Govt.

Didn't know whether to laugh or cry.

The major cribs:

1) We can't meet him when we want to.

2) He doesn't let us influence the appointment of ministers or bureaucracy.

3) He is not fixing our problems.

4) He is no longer pro-industry.

5) There is concentration of power and decision making at the PMO

Imagine, the top industrialists of the country requiring to meet the PM so that they can run their business and clean up their balance sheets!

Essentially they don't want the government to interfere as long as things happen their way and want the government's help the moment things get difficult."

That is why I say, the effort to bring Achhe Din for the country on sustainable basis may be really painful for stock markets in the short term.

The sadistic relief is that this government continues to remain market centric and may not do much to disturb it.

This is however only that - a sadistic relief.

Because we all know too well that by focusing too much on financial markets by compromising on the necessary corrections (or reforms if you like) in the real economy would inevitably bring down the stock and bond prices as we approach the dénouement.

Some interesting reads

Is bull market in Chinese stocks ending?

...as signs of trade collapse emerge

Wednesday, May 6, 2015

It's not just about politics or Congress

Thought for the day

"There are basically two types of people. People who accomplish things, and people who claim to have accomplished things. The first group is less crowded."

- Mark Twain (American, 1835-1910)

Word for the day

Diurnal (adj)

Of or belonging to the daytime.

(Source: Dictionary.com)

Malice towards none

Is there anything called "Indian" culture?

It's not just about politics or Congress

Many people have raised objection to the comparison of Rahul Gandhi with Amitabh Bachchan in my yesterday's post. Some feel that it unreasonably reflects on the Gandhi scion while the other feel that he is no comparison to Mr. Bachchan.

I refuse to get drawn into this controversy. My objective was just to draw, which in my view was, an easily comprehendible analogy to highlight the current state of the Congress Party and its leaders. I had no intention to compare two individuals.

One comment in particular needs clarification. My dear friend and a reputable equity analyst chided me - "Which hit did Rahul deliver before this slump hit him?"

To this I may clarify that my point needs to be understood in the right perspective. I stated that presently the Indian politics is totally personality driven. The parties have been relegated to somewhere backstage. Thus it is popular to invoke Rahul Gandhi's name while referring to the Congress Party. It again has nothing to do with any individual per se.

I would also like to highlight that understanding the current political paradigm and the likely directions it could move is critical for investment strategy.

A continuation of the current state of quandary with respect to economic growth model could potentially push Indian economy down permanently into the realm of so called Hindu Rate of growth (~5% in new context), I fear.

I strongly believe that the inherent austerity, industriousness and enterprising skills of the Indian populace are sufficient to attract capital needed to provide escape velocity for moving the Indian economy into higher orbit.

It is fashionable and correct to say that whatever growth and development has been achieved so far is in spite of the government and not because of it.

Limiting the role of government to developing and maintaining the institutional framework relating to law & order, sovereignty, external security & relations, municipal functions, inter-state relations and facilitating trade & commerce, may improve economic conditions much faster than otherwise.

From Congress (I) to INC

Coming to the Congress Party now.

In my view, the dissipation of Congress Party started in 1975 with the imposition of national emergency. The process of decay accelerated a bit in 1984 as some Shatraps started to question the leadership of Rajiv Gandhi. Rajiv Gandhi's assassination added some more decibel to dissenting voices. Anointment of Sonia Gandhi as party chief ruffled many more feathers. Though the electoral victories of 1980, 1984, 1991, 2004 and 2008, which were mostly outcome of poor opposition and not necessarily due to strong positioning of the Congress Party itself, helped maintaining the facade of unity and supremacy of the family.

After a series of electoral debacle since 2012, and near decimation in 2014 general elections, the facade is slowly coming off.

From media reports, the Congress Party may appear to be in revival mode, but truth may be far from it. The true state of affairs is that the party barely exists in most populated states like UP, Bihar, West Bengal, Tamil Nadu, and Jharkhand. It has been out of Power for more than a decade in states like Gujarat, MP, Chhattisgarh and Odisha.

Greater media coverage for Rahul Gandhi may change nothing in this state of affair. Raising issues like Land Acquisition & home buyers' plight and blocking important legislative business in parliament with add little precious to the dwindling fortunes of the party.

These tactics do not solve any of the five major problems afflicting the party; which could be summarized as follows:

(a) Consistent erosion in traditional support base

Congress party has failed in recognizing that the younger party joins politics as profession and not as a selfless service to the nation. They prefer to join parties or organizations which provide an opportunity to fulfill their aspiration to reach at the top.

Congress party offers no such prospects - (i) The positions at the top are dedicated to the chosen few; (ii) The party is not in a winning position in majority of constituencies; (iii) The brand Congress no longer evoke respect and dedication; (iv) In many regional alliances the Party has accepted to be minor partner.

So unless the Congress party presents a political paradigm that appeals to the aspiration of youth, it may not add to its support base on sustainable basis.

(b) Legacy of 6 decades of sub-optimal performance

Sub-optimal performance of successive Congress governments since independence takes away from the Congress Party any moral right to criticize failure of any other government.

The Congress Party needs to present an economic paradigm that shows the potential for higher, faster and sustainable economic growth.

The leadership need to inspire the youth, ethnic groups, community leaders, business community and global Indians through its actions and programs.

(d) Feudal arrogance.

The language normally used by the party in its public discourse smacks of feudal arrogance. "We gave you this and that" is no longer acceptable to the people born after economic liberalization in 1991.

The language of the public discourse of the party needs to change to reflect a cooperative and collaborative approach towards politics.

(e) Cultural alienation of the party

In its desperation to achieve short term goals of winning elections, the Congress Party has positioned itself as a group of atheist who stand distant from the religion, traditions and culture of dominant ethnic groups.

This needs to change. The Party needs to understand that regardless of technology, urbanization and economic progress, we are a society where people walking hundreds of miles barefoot carrying Kanwars in the month Shravan; people carrying the Palki of Sai Baba; people visiting Tirupati Bala ji, Amarnath, Vaishno Devi, Guruvayyur, Char Dham etc.; households hosting Ganpati and Durga Maa, and number of Tazias in various Muharram processions is rising exponentially every year.

The Party failed to recognize that even communists in West Bengal participated in Durga Puja with same zest as non-communists to stay in touch with people.

I have highlighted in past (see Mandate 2014: Definitely Transformative) that In Indian context, Indian National Congress, as it existed before independence is the only viable alternative to the right wing politics.

In case the present Congress Party fails to broadbase itself to regain the prominence it enjoyed in pre-independence period, the motley group of degenerated socialists will continue to occupy that space and this is not a good news for the economy of the country.

I have also mentioned that raking up issues like Land Acquisition will not help Congress Party in any manner whatsoever - for (a) Congress' apathy is mostly responsible for the plight of the farmers and (b) "No land" is much bigger problem than the land. (see "Land" does not get you votes, "No Land" does and Part II).

Tuesday, May 5, 2015

Lost my Way

Thought for the day

"The secret of getting ahead is getting started."

- Mark Twain (American, 1835-1910)

Word for the day

Aver (v)

To assert or affirm with confidence; declare in a positive or peremptory manner.

(Source: Dictionary.com)

Malice towards none

Running, running 'til the fear is gone, don't know where I'm going

Don't know if I'll make it home, tell Mama I'm sorry

I know that I've made mistakes, tell her it ain't easy

I'll see her on judgment day, I lost my way

I lost my way, yeah, I lost my way, yeah

("Lost My Way" - Lecrae, King Mez & Daniel Daley)

Lost my Way

Amitabh Bachchan is inarguably a living legend today. Almost all Indian film lovers accept him as Maha Nayak (super hero). But there was a time in 1990s when his fans were deeply disappointed in him. Many were shocked to see his decline from the invincible position he commanded through the decades of 1970s and 1980s.

A brief and miserably painful excursion in politics, death of mentor Manmohan Desai and a disastrous business venture (ABCL) left the super hero broke financially, weak physically and disturbed emotionally.

In that phase of adversity, he made many attempts to recover. But each attempt would push him further down, like he was stuck in quick sand. Each failed film was followed by even a worst one. He did projects like Toofan, Ajooba, Jadugar abd Lal Badshah, which were thoroughly unworthy of a super star.

Friends deserted him and government authorities persecuted him. In that hour of frustration and dismay he got the company which he might have avoided usually. Fortunately, he soon found his way out of the black hole and was finally rid of the avoidable company.

I find Rahul Gandhi in somewhat similar situation as the Big B found himself in 1990s. He is defeated, doing one bad project after another and is keeping avoidable company.

Consequent to BJPs overwhelming victory in the general elections of 2014, the Indian political spectrum has lost its equilibrium. The traditional Right has intruded into the central territory. The traditional Left has been squeezed out to fringes. And the traditional Center has become too crowded with less space and larger number of claimants.

Rahul Gandhi does not seem to be clear which part of the spectrum he wants to start his comeback trail with. One day he is seen exploring the extreme right with trek to Kedarnath. The other day he is seen at the left corner talking about landless labors. And then suddenly he crops up at the middle discussing the plight of middle class home buyers!

Poorly mixed concoction of Gandhi and Marx

A study of the history of Indian politics would suggest that unlike western democracies only an abysmal minority of Indian voters are strongly committed to a political or socio-economic ideology.

The political discourse in India is usually dominated by contemporary issues and personalities. The economic issues raised during elections are mostly confined to the slogan of poverty alleviation. In recent times corruption has also become a popular electioneering slogan.

Perhaps, no political party seems to have taken issues of poverty alleviation or corruption seriously. Therefore no one has bothered even to outline a conceptual or ideological framework for solving these problems.

Ideologically, the Congress Party abandoned the most acceptable and perhaps most suitable Gandhian Socialism in favor of Nehruvian Socialism that was a poorly mixed concoction of Leninist central planning (central ownership and management of resources and businesses) and British colonial legacy (discretionary patronage to the faithful and loyal).

The model was certainly at cross-purpose with the constitutional federal structure. Poverty, poor governance and corruption were natural off-springs of this system.

BJP started with Deen Dayal Updhaya's Integral Humanism. However, in 1990s it adopted Gandhian Socialism (which is not too far moved from the Integral Humanism) as the principal doctrine. The present leadership has however presented again a poorly mixed concoction of Integral Humanism and Laissez-faire model used by some developed economies principally USA.

Politically leadership preaches "Human Being" as the fulcrum of policy making. Whereas the executive is more focused on "Business" and "Macroeconomics" as the central theme. The conflict is for everyone to see. The consequence is that we seem to be moving in no direction.

The people at the left end of the spectrum exercised significant sway on the bottom of the pyramid in Indian society since independence. They controlled most of labor unions. Though divided between Marx, Lenin and Mao they still were the preferred choice of landless, oppressed and intelligentsia. There was a time when being poor, intelligent (economist, thinker, poet) or rebellious meant being communist.

The things however began to change in late 1980s post dismantling of USSR and the German wall. The Lenin and Marx were relegated to the history lessons. The economic reforms initiated in China under Deng Xiaoping's supremacy, further pushed back the traditional Marxists.

Insofar as the Lohiaites (socialist parties occupying the left of the center space in Indian politics) are concerned, they deserted both Lohia and his ideologue Gandhi as soon as they came into power. Degenerated into motley feudals they mostly have no commitment to any economic idea and mostly follow Congress agenda.

In next couple of days I shall discuss what Rahul Gandhi is doing wrong and how he could redeem Congress out of current mess.

Trivia

By out rightly rejecting the points made by Arun Shourie, and even disparage him, BJP has proved his point.

The people who have observed L. K. Advani closely, would confirm that he is not the one who could be silenced easily. Be sure, that we would hear the echo of Mr. Shourie's views in LKA's memoires which would be published within few months of PM Modi relinquishing PMO.

On the smaller screen, Arvind Kejriwal has made a full proof plan to hold central government responsible for all his failings.

He is instigating BSES to disrupt the electricity supply to Delhi when temperature would be running at 45C and blame central government for the misery of people.

Similarly, Manish Sisodia, is planning to disrupt the student's life by proposing a separate education board for Delhi.

Monday, May 4, 2015

Rift too wide and deep to ignore

Thought for the day

"A man may imagine things that are false, but he can only understand things that are true, for if the things be false, the apprehension of them is not understanding."

- Isaac Newton(English, 1642-1727)

Word for the day

Maudlin (adj)

Tearfully or weakly emotional; foolishly sentimental

(Source: Dictionary.com)

Malice towards none

The Thakur from UP is in news again!

Not a good omen.

Rift too wide and deep to ignore

The recent prints of manufacturing data from China, Japan, and EU have raised concerns in all quarters. The US picture is still mixed, but definitely less buoyant than what it was five months ago when the talks of summer 2015 Lift gained currency.

Back home, the contraction in core sector in March, the first in 17 months, put a question mark on the government's claim of removing supply side bottlenecks to improve manufacturing and augment employment opportunities. The core sector growth in FY15 at 3.5% was slowest since 2.8% of FY09.

Though it may be slightly early to pass a judgment as conditions in mining, power, steel and cement etc. may improve post coal mine allocations and new gas allocation mechanism that came into effect recently. Nonetheless anticipating a dramatic improvement looks tough as of now.

To make the matter worse, the outlook for monsoon this year is cautious and global oil prices have shot up sharply. This clouds the inflation and rate outlook.

Under the circumstances, it is pertinent to take note of the concerns expressed by the federation of Indian Export Organizations (FIEO) regarding plummeting exports. The apex body of exporters has warned that the figures that are coming in are very worrying. The exports during FY16 are seen reaching even last year's figures of $310 billion, save for a miracle.

As per reports the container exports from Ludhiana in the first 15 days of April fell 26.83% over the year-ago period. A sharp INR appreciation against Euro and Yen has negatively impacted export margins and competitiveness of Indian exports vis-a-vis peers like China.

In these circumstances, the suggestions of goal incongruence between RBI and government of many key issues is extremely disturbing. Though both parties have strongly denied the presence of any rift, it is too wide and deep for everyone to see.

Entangled wool and a Papad

Travelling to remote areas of Himachal Pradesh in late 1980s, I came across this brilliant personal behavior assessment methodology used by the tribal people.

The elders of the families would get together to discuss the matrimonial alliance of their wards. The prospective groom is given a bunch of badly entangled wool and the prospective bride is given a very thin Papad and a pitcher fully filled with water.

The boy is asked to untangle the wool and make a ball of it. How fast and neatly the boy could do the task determines how wise, patient, industrious, competent and resolute he is.

The girl is asked to roast the Papad and walk on a straight line with the water filled pitcher on her head. A cleanly roasted Papad is taken as proof of patience and grit. A successful straight walk without spilling the water, proves the qualities like strength, focus, determination, dedication, and self-control.

Applying this logic to some key ministers of the government, we find that they have entangled the wool even more. A little more messing up would create knots that would render the entire bunch of wool useless.

The Papad they have roasted is half burnt. They are also not walking straight and letting the water to spill.

Three major problems that I could comprehend are as follows:

(a) There is insufficient conceptual clarity on the economic model this government seeks to implement and the path that needs to be taken to achieve the goal. The conflict between free market economy, gandhian socialism, and cultural nationalism is palpable. There is sincere attempt on the part of the prime minster to resolve the conflict and discover a middle path. However, there is little sign of any resolution at this point in time.

(b) Like media, many organs of the government are also suffering from the "Breaking News Syndrome". Everyone rushes to claim birth of child, even where the prospective parents have not even met each other.

The consequence is that the debate is distracted easily and the process gets miscarriaged prematurely.

In my view, if the proposals like NJAC, Land Acquisition, Resettlement of Kashmiri Pundits, Public Debt Office etc. were discussed internally and with stakeholders in detail before claiming brownie points in public, the chances of success would have been higher.

These problems are not insurmountable. I hope, these will be overcome sooner than later. But till then, markets will remain jittery.

After Delhi assembly, the West Bengal local body elections have indicated that Modi-Shah combine may not be invincible. A defeat in Bihar assembly will send strong confirmatory signals.

FPIs - call their bluff now

In past two decades a lot of emphasis has been given to the foreign portfolio investors (FPI) making investments in the Indian equities.

As I have mentioned in my earlier post, we have seen few instances of irrational boom and bust cycle driven by collective withdrawal of FPI money. 1998 post nuclear blast exodus, 1999-2001 dotcom bubble and bust, 2006-2009 easy credit driven boom and bust are some major incidences.

However, I am not aware of any scientific study that shows long term positive correlation between the performance of Indian economy and/or equity prices and the direction of FPI flows.

However, there is enough anecdotal evidence to show the damaging impact of the excessive volatility caused by their collective actions.

An elementary study of the trends in Foreign investments in the listed companies in India gives the following results:

(a) Since 1993, the cumulative FPI investment in Indian equities is Rs8344bn (US$171bn). In INR terms they have earned an absolute return of 440% over this period. In USD term the return is lower at 316%. This compares with over 1000% return in Sensex during the period from 1993-and now.

(b) During 1993-2014 period Sensex has given negative return in 7 calendar years. Whereas the FPI flows have remain positive in all but 3 calendar years. The meaning outflows were seen only during 2008 (Rs530bn). On other two occasions flows were nominal - Rs7bn in 1998 (post nuclear blast economic sanctions) and Rs27bn in 2011 (post CWG/coal scam and fear of EU disintegration). (see chart on next page)

(c) Foreign investors have preferred to invest in secondary market and have avoided participating in Indian businesses (see table on next page):

* Foreign holding in Indian listed companies is about 34%. Only 9% of this is classified as promoter holding (or FDI). Rest 25% is FPI.

* In market cap wise top 10 Indian companies, the foreign promoter holding is just 1.4% (only one company, viz., Bharti Airtel). Whereas the FPI holding in these companies is 42%.

* In foreign holding wise top 10 Indian companies, the foreign promoter holding is 61% vs. FPI of 25%.

* In private Indian companies (ex MNC) foreign promoters holding is just 4% vs. FPI holding of 29%.

Prima facie it appears that foreign investors have avoided partnering with Indian promoters, and preferred to invest in companies where they exercise control over the management. Also, they have mostly found India an attractive investment destination in past two decades, regardless of political instability, corruption, poor corporate governance, and no-ease of doing business. Why do we need to kneel before them after every sale of US$1bn?

Interesting reads:

A 60-Year Trend Of Exploding Money And Imploding Growth

An Even More Dismal Science

16 Signs That The Economy Has Stalled Out And The Next Economic Downturn Is Here

Bank of Japan is beginning to part with reality

Trivia

Another round of tariff cuts in telecom services. The private players have cut national roaming charges and public sector MTNL makes all call during night free.

A similar price war is happening in airfares.

Both Big Bazaar and Reliance Retail are at war in retail discounting.

The point to ponder is whether this marks Achhe Din for consumers or the consumers will have to indirectly pay for the indulgence of these vendors!