Vijay Kumar Gaba

Monday, September 21, 2015

Nifty: Breakdown prevented but internals weaken further

Thought for the day

"It is the mark of an educated mind to be able to entertain a thought without accepting it."

—Aristotle (Greek, 384-322BC)

Word for the day

Too-too (adj)

Excessively and tastelessly affected

(Source: Dictionary.com)

Malice towards none

Common youth of India who had zestfully come out of their comfort zones and took on streets just a couple of years ago - is again disenchanted by politics and politicians.

Who is to blame for this antipathy?

Nifty: Breakdown prevented but internals weaken further

As expected (see here) last week NIFTY mostly oscillated within the 7560-7940 range and successfully prevented a break down. Nifty also managed to close the week near 8000 mark, thus leaving chance of the pull back rally extended to 8240 this week.

The internals for the market though continue to weaken. Despite an eventful week the market completely lacked momentum. Institutional activity remained low. Market breadth remain almost even. Implied volatility fell materially.

The retail participation remained high. The small caps showed first sign of capitulation, though broader market continue to outperform.

As the comparison with November 2007-March 2009 period shows, this usually is the beginning of the last leg of a market cycle. Expect large cap to outperform in next 6-9 months as market searches for a bottom.

Friday, September 18, 2015

It's not about monetary policy alone

Thought for the day

"Whatever the tortures of hell, I think the boredom of heaven would be even worse."

- Isaac Asimov (American, 1920-1992)

Word for the day

Tommyrot (n)

Nonsense; utter foolishness.

(Source: Dictionary.com)

Malice towards none

Who has inched closer to UNSC permanent seat:

India

Germany

Japan

All of the above

None of the above

It's not about monetary policy alone

I am not sure how many people will agree with me on this. Regardless, I have an opinion - the autonomy and objectivity of central bankers is highly overrated. I find a variety of events (including politics and geo-politics) reflecting on the monetary policies of central bankers across the world - Our RBI and US Federal Reserve being no exception.

With this premise, I believe that the FOMC decision on reversing the rate cycle needs to be anticipated in the following light.

Post Lehman collapse, it appeared that the US is becoming a marginal force in the emerging global order. Emerging economies like BRIC, South Africa. Mexico, Indonesia etc. asserted themselves as leaders in a new multipolar world. G-20 was formed to undermine the supremacy of US led G-3, G-8 etc. The global multilateral financial and development institutions also saw rise in influence of these countries in their affairs.

However, the events of past one year are a clear subtle pointer to the fact that Uncle Sam may have lost a few battles, but it is close to winning the war. Consider this:

(a) Plagued by sub-prime crisis which crippled its financial institution, the US did not bow down. It successfully transmitted the disease to these resurgent emerging economies and rescued its financial institutions. Most emerging economies, especially India and China are now struggling with huge sub-prime assets with no clue as to how to get rid of these. US banks are now inarguably amongst the strongest global financial institutions.

(b) Many influential voices from the US have already suggested that the era of global economic cooperation and coordinated policy action is over. We will do only what is in the best interest of the US is the new mantra. No one is mentioning Plaza Accord of 1980s. If monetary tightening in the US disrupts common man’s life in over 100 countries - so be it.

(c) After becoming energy independent, the US does not bother about situation in Middle East or South Asia. Iraq was raided merely on the basis of unfounded doubts about weapons of mass destruction. Syria has actually used these weapons and no action is promised. The proposed Immigration Bill also indicates towards rising protectionism.

(d) US Federal Reserve, who bought all the bonds that came its way in past 3years has ended up making much more money than what people thought it would have sank in saving US financial markets. In past 10months, Fed has contracted its balance sheet and USD has seen its strongest rally since 1984 (see here).

In my view, at the most opportune time US will strike hard on the opponents. A swift reversal of rate cycle (and consequent stronger USD) may adversely impact exports and earnings of many large US corporations. It may also adversely impact housing market as the mortgage rate rise. This would all be temporary and manageable damage. However, it will inflict a material disaster on the competitors like Russia, China, and Arabs and at the same point cushion US against the contagion reaching her shores.

In simple terms, the rate hike is not about monetary policy alone.

Wednesday, September 16, 2015

2008 like panic selloff will be an opportunity

Thought for the day

"No sensible decision can be made any longer without taking into account not only the world as it is, but the world as it will be."

- Isaac Asimov (American, 1920-1992)

Word for the day

Mollify (v)

To soften in feeling or temper, as a person; pacify; appease; to mitigate or reduce;

(Source: Dictionary.com)

Malice towards none

Aug WPI down 4.95%. Will the Government come forward to claim credit for this fall in prices?

or will it accept it as a problem?

2008 like panic selloff (not likely) will certainly be an opportunity

The economists and strategists worldwide are busy preparing for the first Fed rate hike ("the Lift") in over a decade.

The recent data has pushed the debate over "IF" to the fringes. The debate over "WHEN" is also no longer aggressive. The consensus is that it is certainly happening in calendar 2015.

Those whose strategy and portfolios are fully aligned are expecting the Fed to begin lifting in right earnest from 17th day of September 2015 and reach summit before summer of 2018. Simply, look for OW USD, UW Gold, UW EM Currencies & Equities to locate this group.

Those who are not fully prepared are hoping it to begin sometime in 2015 and then pause for a long time giving them time to prepare for the yet newer normal. To locate this group look for terms like "differentiated EM strategy", "bull market in bonds not over yet", "opportunities in peripheral European debt", "Chinese equities offer great value", etc.

There is a small group busy in overanalyzing China and the deflationary contagion it is exporting. The members in this group do not see much chances of the "Lift" anytime soon. They are obviously least prepared. Look for OW US Treasuries, OW EMs to locate this minority group.

The debate is mostly now focused on "WHAT" would be the likely consequences of the Fed rate hikes.

First where majority is in agreement - USD will strengthen in all likelihood against the EM currencies that have enjoyed weaker USD, near zero interest rates and higher commodity prices for over a decade.

The consensus however has yet not emerged on the extent disruption such rate rise will cause in the short to midterm. Many emerging markets, especially those driven by commodity boom, have accumulated debt in billions of USD debt that needs to be repaid at some point in time. The rise in their accumulated debt consequent to USD appreciation, along with higher debt servicing cost and lower commodity realization, will force dilution of huge USD reserves accumulated over years. Consequently the world will face tighter liquidity, demand contraction, asset price erosion and strengthening of deflationary pressures. These effects may however be mitigated materially if the "Lift" is accompanied by material liquidity infusion by US Fed (QE4!), ECB, BoJ and PoBC.

Second, where there is little agreement - how it will impact the US global corporations that drive a large part of their revenue from emerging markets, and the consequential impact on the US local job market.

Insofar as India is concerned, in my view, Fed rate hike would be relatively smaller part of the problem. The direct impact may be limited to the companies with unhedged exposure to USD debt. The impact on trade account may also not be materially disruptive.

The market disruption could be caused by tighter liquidity and consequent acceleration in FPI outflows.

A 2008 like panic selloff (not likely) will certainly be an opportunity here.

Tuesday, September 15, 2015

Fed hike: Sooner, faster

Thought for the day

"Life is pleasant. Death is peaceful. It's the transition that's troublesome."

- Isaac Asimov (American, 1920-1992)

Word for the day

Genesis (n)

An origin, creation, or beginning.

(Source: Dictionary.com)

Malice towards none

After KM Birla, now Cyrus Poonawala buys an expensive (Rs725cr) property to live.

What about investing in Make in India?

Ain't it more Italian or Greek than American?

Fed hike: Sooner, faster

David Rosenberg, chief economist and strategist at Gluskin Sheff, highlights, in one of his recent reports, that the US labor market is on the verge of becoming a sellers' market.

Rosenberg writes—

"The ratio of the unemployed to the level of job openings has decline to 1.43x, far below the near-7x peak at the worst part of the Great Recession and a place we have been at just two other times before (since the JOLTS data were first published.)

This may well be the most accurate measure of just how tight the labor market is - we are heading to an environment where we are down to one person competing for one job.

The sands have shifted towards this being a sellers' market for labour.

Wage acceleration either starts real soon or we can simply take the laws of supply and demand and throw them in the dustbin."

This essentially means two things:

(a) The wages in US are likely to begin their northward journey soon; and

(b) the US Fed may begin to hike soon and complete the task faster than most are expecting.

In an unrelated but still pertinent move the New York State has decided to raise minimum wage for fast-food workers to US$15. Political observers expect the move to reverberate in other States also.

The positive demand-supply gap in US labor market combined with (a) stronger USD; and (b) pressure on export prices due slower European and Chinese demand may be a good news for Indian technology services outsourcing companies.

Regardless of Trump's rhetoric, we may actually see relaxation in H1b quotas in next few years.

Good times may be round the corner for India IT, ITeS, and CRAMS companies. Just watch out for more competitive devaluation of CNY.

Monday, September 14, 2015

Nifty: Precariously close to breaking point

Thought for the day

"People who think they know everything are a great annoyance to those of us who do."

Isaac Asimov (American, 1920-1992)

Word for the day

Swimmingly (adv)

Without difficulty; with great success; effortlessly

(Source: Dictionary.com)

Malice towards none

Three cheers for Leander Paes!!!

Have you noticed, Indian players usually do much better when paired with foreigners.

Doesn't it apply to business also?

Indian managers have done exceedingly good with foreigners like Page, Gates, Buffet, etc.

Nifty: Precariously close to breaking point

Last Friday Nifty tested the breaking point of a major bearish head & shoulder pattern and staged a feeble bounce back.

As the Nifty daily chart below shows, a material close below 7560 level will confirm a yearlong H&S pattern, opening the doors for a much larger and sharper correction over next six months.

In view of the higher volatility expected post FOMC rate hike decision on Friday, it is more likely that the market may continue to oscillate in the 7560-7940 range this week, before breaking out (or down) next week.

However, if Nifty manages to close above 8000 this week, the pull back rally may extend to at least 8240 next week.

In any case, from six months perspective, the eventual lower target of Nifty remains 6860 and the upside at this point in time appears capped at 8600 level.

A bounce back above 8170 level on favorable Fed, will be an opportunity to aggressively sell.

This week however my strategy should be wait on the side lines. In case of a early fall below 7600 during the week, I may consider buying near month ATM straddles for holding till Monday morning.

Friday, September 11, 2015

Crisis far away, but govt pressing the pedal hard

Thought for the day

"There is not much danger that real talent or goodness will be overlooked long; even if it is, the consciousness of possessing and using it well should satisfy one."

-Louisa May Alcott (American, 1832-1888)

Word for the day

Lackadaisical (adj)

Without interest, vigor, or determination; listless; lethargic

(Source: Dictionary.com)

Malice towards none

Heard on Raisina Hills about Bihar strategy - "MSY will contest all seats allocated to JDU in Bihar alliance to garner the Yadav and Muslim votes. Post elections, both Yadav relatives (LY and MSY) will form a majority government and show the door to Nitish Kumar!"

Crisis far away, but govt pressing the pedal hard

The more the government sings "All is Well", the more the people are getting suspicious about the real health of the economy. Though the situation is still miles away from being qualify as "crisis", the distance could be covered in no time if a global contagion propels the Indian economy down.

At this point in time like most of my friends, I am not too sure about where the problem actually lies. It could be that the government—

(a) has access to specific information about economic progress in the country, but not able to communicate it properly; or

(b) is mostly oblivious of the conditions at the ground and just indulging in complacent conjecturing based on random data like monthly IIP numbers or car sales; or

(c) is well aware of the slack in the economy and rising discontentment, but has chosen to live in denial, hoping the problem will get resolved on its own with the passage of time; or

(d) is struggling to find effective solutions around which consensus could be built; or

(e) knows the problem well but has no clue about the solutions.

Whatever be the case, it would leave lot of space for skepticism and caution in investment.

Another thing that never fails to intrigue me is the government's fixation with China.

The finance minister, said in a recent interview with the BBC: “An economy which can grow at 8 to 9 per cent like India certainly has viable shoulders to provide support to the global economy.”

In one of the strongest “move-over-China” remarks, Jayant Sinha, minister of state for finance, said Delhi was ready to “take the baton of global growth” from Beijing. He chirpily told an audience in Bihar, one of India’s poorest and most benighted states: “In coming days, India will leave China behind as far as growth and development matter.”

We all know that in the context of global economy, to compensate for 1% fall in China's GDP, India would need to add 4% to her GDP.

Instead of indulging in shenanigans over slow down in Chinese and making rhetorical claims, the government needs to put its head together and seriously re-work its China strategy.

This is the time when we could strengthen our economic ties with China. This may not only pave way for resolution of geo-political issue in due course of time, but also help India overcome its primary of capital inadequacy.

We could use idle factories of China to produce for Indian markets at much cheaper cost, till the time our manufacturing capabilities are adequately augmented.

There is a major risk - that cheaper sourcing from China may lead to miscarriage of PM's "Make in India" baby. But ain't this risk too obvious to worry about?

Thursday, September 10, 2015

What da' ya' bring to table?

Thought for the day

"Housekeeping ain't no joke."

-Louisa May Alcott (American, 1832-1888)

Word for the day

Ogdoad n)

The number eight or group of eight.

(Source: Dictionary.com)

Malice towards none

Over to Patna!

What da' ya' bring to table?

The Finance Minister said on Wednesday that the government is finalizing a list of tax exemptions to be phased out as part of the exercise to reduce corporate tax rate to 25 per cent in four years. He also clarified that every tax demand cannot be termed as tax terrorism, he said, the government will not relent on pursuing black money in India or abroad.

To me it implies that in next four years the effective corporate tax rate may be 10-15% higher than the present effective rate of tax. And it will be much more difficult to evade or "plan" tax liability.

I am sure it does not sound music to many years.

My interaction with many of these market participants, including industrialist, traders, brokers, analysts, investors and bankers, in past many months has underlined a serious dichotomy. The market is asking for something it does not want – serious economic reforms.

An overwhelming majority of publically traded companies are found to be direct or indirect beneficiary of (a) the inefficiencies of the administration; (b) lack of transparency; (c) incongruent policy framework; (d) unduly supportive politicians; (e) government largesse in form of misdirected subsidies; and (f) protection from fair competition at the expense of consumers, etc.

Some real economic reforms, as against administrative and procedural corrections, could destroy the basic premise behind many large Indian companies.

The economic reforms often mean transformational changes that not necessarily lead to immediate rise in corporate profitability and aid in resource grabbing. On the other hand these usually do lead to lesser protection, more competition and larger accountability for corporates. If you do not want to pay taxes, cost of compliance and market linked compensation for exploitation of natural resources clamoring for economic reforms may not yield much.

Those clamoring for reforms may want to figure out whether:

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

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

(c) Caste, communities, families and individuals which command ownership of the major part of economic resources and occupy most of the social space, are likely to voluntarily vacate some space for the historically oppressed and downtrodden.

Wednesday, September 9, 2015

First things first

Thought for the day

"Let my name stand among those who are willing to bear ridicule and reproach for the truth's sake, and so earn some right to rejoice when the victory is won."

-Louisa May Alcott (American, 1832-1888)

Word for the day

Febrile (adj)

Feverish, with fever

(Source: Dictionary.com)

Malice towards none

The so called "Modi effect" has been completely neutralized from equity and forex market.

Time is now to decide - if a new beginning should be made or let things be like that!

First things first

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

The national media widely and prominently reported the fall of Sensex to May 2014 level when the incumbent government assumed charge from the outgoing UPA government. INR is weaker by over 10% vs USD, since then.

The astounding victory of NDA had raised staggering expectations in all sections of the society. Mandate 2014 was unmistakably for a person who projected himself as epitome of pragmatism, development, inclusivity, nationalism and good governance. He therefore does not enjoy the luxury of hiding behind the shields like limitation of coalition, party ideology and conventional political paradigms. People afforded him complete freedom to deliver on the promised change and expected an express delivery from him.

After 15months of regime change, the mood at best could be described as that of circumspection.

First to set the record straight, I note that the total market capitalization of companies listed on BSE has risen to INR92trn from INR82trn at the end of May 2014. The real effective exchange rate of INR (REER) for the basket of 6 as well as 36curremcies is also higher as compared to May'14 level.

So, if equity market and INR valuation is any criteria to evaluate the performance of a government, it has not been bad, especially in light of global uncertainties and volatility.

Second, I had been frequently highlighting that Narendra Modi unmistakably has the administrative and strategic prowess to drive the change. However, it would be preposterous to assume that he can do it on his own. He needs the support and cooperation of all in his colossal endeavor. So far there is little evidence of cooperation from the fellow politicians (including from BJP, allies, and opposition) and business community. The problem therefore is that a vast majority of 1.26bn Indians is expecting Narendra Modi to deliver for them, at least on economic front, but no one is willing to give anything from their side.

Least of all, the populace which has grown to be non-compliant by habit, not necessarily by intention, is not even willing to change habits like spitting on roads, violating traffic rules, encroaching on pavements in front of their house/shops, and exploiting domestic helps and child labor etc.

PM has met the captains of Indian industry yesterday. I am not privy to what transpired in the meeting, but from anecdotal evidence and media reports I can guess that it was nothing useful - in the sense that industry sought favors which the government is not in a position to grant and offered nothing in return.

In my view, two tasks need to top the list of priorities for the government–

(a) Bridging the multitude of deficits prevalent in the country, especially trust deficit, governance deficit, compliance deficit, skill deficit, social and physical infrastructure deficit, and capital deficit. Though the Prime Minister has shown vision to achieve past of this task, there is little evidence of execution on this front.

(b) Bringing India into a state of equilibrium by removing social, and regional, economic imbalances. This task cannot be accomplished without active cooperation of all the states. So far no reason to be optimist on this count.......to continue

Tuesday, September 8, 2015

Jounrey more important than destination

Thought for the day

"Do the things you know, and you shall learn the truth you need to know."

-Louisa May Alcott (American, 1832-1888)

Word for the day

Schlemiel (n)

An awkward and unlucky person for whom things never turn out right.

(Source: Dictionary.com)

Malice towards none

The simple question is "whether OROP will remain confined to armed forces, or it will spread to other public services also?"

A more complex poser would be "Should it?"

Jounrey more important than destination

Speaking to the journalists at the sidelines of G-20 meet in Ankara, the finance minister Arun Jaitely reportedly said, "Factors like the Chinese devaluation of yuan and the US Fed's likely interest rate hike are "transient" and it will be only the real economy that will dictate the currency rate fluctuations and markets in India".

I am not sure whether this statement was made in zest or he really meant it. For, if he really meant it, the observers may want to evaluate if he is living in denial. I would leave it here.

Nonetheless, in my personal belief such events are never "transient". Though cyclical in nature such events invariably leave a lasting impression on global economic structure.

First, standing here in summer of 2015, many market participants who are in their 20's and 30's may see watershed events like making and dissolution of USSR; erection and demolition of German Wall; beginning and end of cold war; signing and termination of Bretton Wood Agreement; rise and fall of Japanese Yen; rise and fall of Asian tigers as "transient" in the global economic and political order; whereas those in their 70's and 80's might still be considering these events in their investment, trading and risk management strategies.

The lesson here is that what is "transient" to an anthropologist or geologist may not be so to a historian or politician.

Secondly, specifically speaking, US Fed rate hike this time is nothing like a point in normal monetary policy cycle. This follows almost a decade of unconventional monetary policy measures that have created imbalances of gigantic proportion in the global economic order. The rate hike would signal the recognition of need for normalization. The process would be lengthy, extensive, somewhat disruptive and not without pain. Denying it as "transient" could have disastrous consequences.

Similarly, liberalization of CNY might mark the beginning of the correction of a prolonged inconsistency in the global economic order. The disproportionate trade imbalances created through "controlled" CNY since the entry of China in WTO winter of 2001 will correct to the detriment of lenders and commodity suppliers who have created capacities to match inflated Chinese demand.

The general view is that these corrections in global order will create good opportunities for India. But these opportunities will not occur automatically. India may perhaps need to effect necessary corrections in her own socio-economic structure to become compatible to these opportunities.

For example, over next decade China may have to run down its forex reserves to compensate for the lower trade and capital inflows. Similarly, the commodity economies thriving on credit driven Chinese and other EM demand may also run down USD reserves to compensate for lower Chinese demand and collapsing commodity prices. USD yield may rise consequent to Fed rate hike attracting USD investments (or carry trade unwind) from across the world. Consequently, the global economy may face a "transient" liquidity shortage.

The wealth of Indian investors could erode materially in the transition if the government does not create conducive environment to attract adequate global flows to compensate for FPI outflows in this period.