Vijay Kumar Gaba

Wednesday, July 20, 2016

That is the precise point! Sir - 2

Thought for the day

"Truth is so generic."

—Iris Murdoch (Irish, 1919-1999)

Word for the day

Nixie (n)

A letter or parcel that is undeliverable by the post office because of a faulty or illegible address.

Malice towards none

Historically, many bull markets in India have ended with a hugely successful mega IPO.

Do ICICI Pru life or Vodafone qualify to be the killjoy?

First random thought this morning

The recently released manifesto of the Republican Party of USA, may sound music to many Indian ears.

The 58 page documents clearly acknowledges India as geopolitical ally and strategic trading partner, while expressing concern over Pakistan's nuclear arsenal.

The moot point is "are we ready to be the strategic ally of the USA for few more dollars?" Especially if it involves providing a base to US forces for launching attacks in South Asia and pacific; supporting US stance on contentious global issues; and increased incursions at our borders.

That is the precise point! Sir - 2

I am sure the government, planning administration and the monetary regulator all fully appreciate the skewed structure of the inflation. These must also have realized that the impact of inflation is not uniform for different segments of the society. Unfortunately, this knowledge and understanding is not adequately reflected in their actions. This could be one of the primary reasons behind the inefficacy of the entire price control and stabilization effort.

For example, consider the following:

(a) The bottom of the pyramid (~35% population that is below poverty line) may be more or less insulated from inflation. This segment mostly consumes cereals and obtains their staple ration through PDS or sustenance farming; avails subsidized public transport, education and primary healthcare; lives in mud houses, footpath, urban slums, workplace; usually does not have paid electricity and water connections; and does not borrow much from organized sector.

Secondary & tertiary healthcare, agri input, and to some extent transportation inflation is a matter of serious concern for them. Effective implementation of food security, better connectivity, drinking water, sanitation and secondary healthcare close to home would provide material comfort to this section of the society.

Lower interest rate along with adequate financial inclusion will only make their life easier through more employment opportunities for them, and provide greater fiscal leverage to government for increasing social sector spending.

(b) Mid and small level famers (~15% of the population) love food inflation as it augments their income. Since, they share many traits of the consumption pattern of BPL families, food and household inflation may not bother them much in routine life. Though the aspirations are hurt and growth is impacted. Lower interest rates will serve them materially even if it means higher inflation.

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

The subsidy program for LED lights and fans is an illustrative example of a perfect solution as it improves energy efficiency & sustainability for the economy and lowers energy cost for the household with minimal fiscal implications.

(d) The upper echelons of the society (~3% of the population) cares least about consumer inflation as their consumption vs. income ratio is extremely low.

This sections of the society cares least about consumer inflation as their consumption vs. income ratio is extremely low. On the other hand the deflationary trend in producers' prices is hurting them badly. Most producers are struggling with poor pricing power and lack of demand. Lower interest rate and higher manufactured price inflation will help these producers. Thus investment and employment will grow.

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

(e) The upper middle class (~10% of the population) again is not bothered about food inflation as much as it is about higher rates. Staples' consumption may not constitute more than 10% of their household income. Lower rates may however help them grow faster in their own enterprises, and invest more in real estate, and capital markets.

(f) The non-farming middle class and lower middle class (~35% of the population) bears the most of the brunt of consumer inflation. Food, health, education, travel, etc. partake material part of their household income. This is the section that needs maximum protection from inflation. Unfortunately, this is the section that gets least attention in the whole exercise.

They are often suppressed through imposition of inflation tax (negative real rates through household inflation minus term deposit rate). This tax, paid mostly by poor and middle class savers for cheaper financing of “crony socialism” and unscrupulous businessmen, has caused serious damage to the basic fundamentals of the Indian economy.

The moot point here is "how the higher lending rates are helping this segment?"

In my view, the focus of policy should be on providing escape velocity to the middle and lower middle class households. Moving this tremendous mass of people to a higher economic strata will provide Indian economy the critical demand base that is necessary for higher growth on sustainable basis.

Once this mass enters the virtuous cycle of "more income-more saving-more consumption-more investment-more income", the potency to address the upliftment of the bottom of the pyramid may increase exponentially.

In post independence period the policy focus has always been away from this most potent section of the society.

...to continue tomorrow

Tuesday, July 19, 2016

That is the precise point! Sir

Thought for the day

"Falling out of love is very enlightening. For a short while you see the world with new eyes."

—Iris Murdoch (Irish, 1919-1999)

Word for the day

Vox Populi (n)

The voice of the people; popular opinion.

Malice towards none

Someone who defied the Party leadership blatantly and enjoyed the hospitability of the principal opposition party is now CM of Arunachal Pradesh.

Indubitably, BJP did lose the plot in Arunachal Pradesh but how is it a victory for the Congress Party?

First random thought this morning

Pokemon craze is spreading like an epidemic.

I avoided at least five near collisions while walking in the famous corridors of the Connaught Place in New Delhi.

It is common to hear parents complaining about rise in their telephone bills as the data usage has jumped manifold.

On the positive side, parents are relieved that at least their children want to go out of home to 'play'!

That is the precise point! Sir

Outgoing RBI governor Raghuram Rajan (of "My name is Rajan and I do what I do" fame) came down heavily on his critics, in an open forum. He challenged them to prove that inflation is low enough to term RBI behind the curve on policy rates - "I am not sure where we are behind the curve. You have to tell me that somehow inflation is very low for us to be seen as behind the curve," he said.

I feel, amidst all the drama in past couple of months, to which the entire world stood witness, this point seems to have been largely missed. In my knowledge, no one bothered to ask the governor - "Sir, please show where the inflation has come down due to the policies followed by RBI in past three years?"

Despite acknowledging on numerous occasions that inflation in India during past 4-5years has inter alia been a function of (a) serious supply constraints; (b) poor weather conditions impacting agri prices; and (c) volatility in global commodity prices, RBI has not adequately explained to the common man - "how tight monetary policy is necessary to help their cause?"

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

Where I stand, I can see that the consumer inflation has been the primary monetary policy consideration in India for past couple of years. This happened at a time (a) when most of the developed world is struggling with deflationary pressures; (b) the producer prices in India have been under immense pressure; (c) the credit demand in the country has completely collapsed; (d) exports are declining ominously; and (e) financial system is seriously undercapitalized.

I cannot find much that would support the current lending rates - not even consumer inflation and relatively stronger INR.

My inquisition to the governor is that under such conditions what is the relevance of RBI's fight against inflation?

From my interaction with people and experience of travelling across the country I understand that through tight monetary policy only a small part of the problem could be handled. The development, fiscal, monetary authorities may need to work in tandem to provide a holistic solution to stabilize the prices.

Unfortunately I have not seen much effort from the RBI side to cooperate on the policy side; regardless of what the former governor Mr. D. Subbarao has revealed in his memoires.

....to continue tomorrow

Monday, July 18, 2016

Nifty: Preparing for an early Diwali

Thought for the day

"Anything that consoles is fake."

—Iris Murdoch (Irish, 1919-1999)

Word for the day

Puissant (adj)

Powerful; mighty; potent.

Malice towards none

A spate of mindless terrorist attacks on civilian around the world implies that the war on terrorism is near completion.

With their back to the wall, these extremists are indulging in the desperate acts of violence.

The key now is now to lose the focus and not open any window for them to escape.

First random thought this morning

Last week the former RBI governor D. Subbarao made some revelations about the RBi- Government relationship. Apparently, the revelations did not startled anyone. Perhaps everyone knows by experience or instinctively, what the former governor is trying to reveal

So not much ruckus from any quarter.

I guess the incumbent governor's memoire would also be treated with similar disdain whenever he decides to write.

Nifty: Preparing for an early Diwali

I have been maintaining that Nifty is most likely to breach it's all time high closing level (8996 recorded on 03 March 2015) around Diwali this year. Well, the probability of this happening is the higher now, than ever before.

In fact, there is a fair chance that Diwali may actually come early this year, insofar as the Indian equity market is concerned.

Though ~3% rally of last week has again created a overbought condition on the near term charts; the monthly and quarterly charts show little sign of fatigue.

Any correction in the near term therefore would be an opportunity to stock up Indian equities.

This week, Nifty faces a strong resistance at 8630 level and has good support in 8308-8323 range. Any fall below 8215 would be an opportunity to create aggressive leveraged positions.

For Bank Nifty, good support is present in 18300-18460 range. For creating aggressive leveraged position waiting for 17600 is advisable.

Short positions should preferably be avoided. In any case, all short positions should be held with a strict stop loss of 8716 spot Nifty.

Friday, July 15, 2016

Birdwatch - 2

Thought for the day

"I've not seen in my lifetime any politician who is a heroic figure. The manipulation that all politicians use on one level or another is so transparent."

—Dean Koontz (American, 1945—)

Word for the day

Skerrick (n)

A small piece or quantity; a bit, e.g., Not even a skerrick of cake was left.

Malice towards none

Yesterday I Saw a socialist MP from Uttar Pradesh, who apparently comes from a extremely poor socio-economic background.

He needed one person to hold his mobile phone and another one to carry his briefcase.

I hope someday SC will intervene to end these feudal luxuries of our elected politicians and public servants.

First random thought this morning

In past couple of decades, I have heard umpteen number of people clamoring for conferring of Bharat Ratna and other honors to the legendary hockey player Major Dhyan Chand. Unfortunately, I have not seen the legend playing on the field. I am not sure how many of those who clamor for the maestro actually have seen him playing.

But I have seen Mohd. Shahid playing, and trust me he was no less a master of the game. He has inspired a whole generation of hockey players. He is struggling for his life in a Gurgaon hospital. And I have not heard anyone praying for him.

Birdwatch - 2

Continuing from yesterday (see here) let me try to answer the two questions that are agitating many minds.

It is critical to note that I do not claim to be any expert in financial markets, economics or politics. I try to see things from a student's glasses. However, being a student who does not like to cram the text books or the notes given by his teachers, my answers are deeply influenced by my observations and intuitions. Needless to say that I do not normally score good marks. Regardless, I am usually happy with the results.

Now coming to the issues under consideration.

As I stated yesterday, since most of the events being feared today are either political or have material involvement of the political establishments across the world. Any collapse in the financial markets due to these reasons will therefore reflect strongly on the efficacy of political establishments of the present day. This is therefore a less likely event in the near term (2-3years at least).

From my experience I am convinced that the politicians are the most ingenious people around. They can think of solutions, and have the courage to implement these, an economist or an analyst would not even dare imagine. Helicopter money in global parlance and MNREGA in the local parlance are just a couple of examples.

Thus, for market to collapse either of the two conditions need to be met:

(a) The political backstop to the markets, in the form of unlimited liquidity, is removed, thus creating a condition of freeze (ala 2008-09) that would cause uncontrollable perspiration at temples of traders; or

(b) The present political establishment completely loses its credibility with people and replaced by an alternative regime, which would essentially be an authoritative (read communist or fascist) regime which could unstintingly write off public debt and redistribute wealth of the rich. (also read here)

The following are some illustrative events that may cause material volatility in the financial market and qualifying as black swan.

· Global investors’ patience with US politicians runs it complete course. USD declines without a proper succession plan in place. With no fiat alternative in place, the world is forced to adopt gold standard after a chaotic year in the global financial system and market place.

· In their act of extreme desperation terrorists launch a massive attack on cyberspace materially impacting the global communication systems.

· The imbalances in the internal economy of the US grow beyond control leading to eruption of a civil war leading to renewed aggression for secession by resource rich states.

· Post couple of more large exits (France and Italy), Germany attempts to take control of indebted smaller European nations to safeguard his financial interest and in the process create a strategic alliance (as opposed to mere financial) of European nations. This leads to emergence of multiple poles in a largely unipolar world. Rise in Sino-Japan rivalry may provide further impetus to polarization. This could eventually lead to end of the era of peace that has existed post WWII. Given the demographic changes since WWII, EU and Japan could be major losers in the process. China emerges as a strong pole in the global strategic balance.

· The recovery in commodity prices, which is mostly a correction in prolonged bear market, collapses precipitously, pulling the world into a recession – the deepest and worst ever.

Now coming to brass-tacks - what should I'll be doing today morning with my investments.

Well, I am fully invested and have no intention to sell for now. I am fully prepared to see 10-15% fall in my portfolio without panicking.

Thursday, July 14, 2016

Birdwatch

Thought for the day

"I don't write a quick draft and then revise; instead, I work slowly page by page, revising and polishing."

—Dean Koontz (American, 1945—)

Word for the day

Tourbillion (n)

A whirlwind or something resembling a whirlwind.

Malice towards none

After BJP made a Punjabi CM of Haryana, the Congress Party appoints a Punjabi as UP PCC President.

Will this become a trend, ending the caste based politics, or these two just isolated instances?

First random thought this morning

After Uttrakhand now comes Arunachal Pradesh!

Nabam Tuki might not enjoy majority in the house and the State may head for fresh elections soon. To that extent SC verdict may not change much in the State.

However, in terms of enunciating principles for (mis) use of Article 356, powers of the governor, and constitutional validity of the legislative work done by a duly elected assembly, under the leadership of a CM (or PM) whose appointment to the office is later declared invalid by the court - this judgment could be a landmark, in addition to the S. R. Bomai judgment.

Birdwatch

The clan of birdwatchers who claim to have spotted Black Swans on the horizon is growing by the day. From the "prospects of Grexit" to "vote for Brexit" a host of experts have sounded alarm bells - loud and louder - to join the clan.

There is little doubt that the non-conventional monetary policies followed by large central bankers, and consequent rise in political and geo-political tensions, have prepared created a bounteous breeding ground for the Black Swans to come flocking. However, the heard of birdwatchers eagerly waiting for them is so huge and cacophonous, that expecting them to take the bait sounds almost ridiculous.

In simple terms -

I fully appreciate the concerns of the experts and agree with them that the global economy is stuck in a gridlock and it is not possible to accelerate the growth in any meaningful measure from the current level.

I also completely agree that the current trend in the monetary policy being pursued by the likes of ECB, BoJ, PoBC et. al. is mostly irreversible.

I share their concerns for the poor savers who are primary victims of the financial repression being perpetrated by the central bankers, in concurrence with their political masters.

Where I differ is that - I do not believe that the events like Brexit; unlimited money printing by ECB, BoJ etc.; tension in South China Sea; shenanigans of North Korean premier; rate hike by US Federal Reserve; ISIS gruesome attacks on civilian targets; Donald Trump getting elected as the next US President; some Italian and Chinese Banks taking the Lehman route to salvation; have the potential to cause the market collapse of the proportion seen in 2008-09.

I strongly feel that all these conditions (in my view these do not qualify to be termed as "problems") have been mostly created by the politicians and not an outcome of independent market dynamics. The solution to these problem therefore has to be political. Mere correction in asset prices will be of no help.

With a ridiculous volume of bonds yielding negative return, gold & silver having risen over 25%, so called safe haven currencies (USD, CHF, JPY) having seen material inflows, it may not be easy to decipher what is "risk-off" and what is "risk-on" trade in the current circumstances.

In my view therefore any collapse in not imminent.

This might raise two questions -

(a) If not these what could cause a collapse in the global financial system; and

(b) What should an investor be doing this morning - Buy, Sell or Hold?

I will try to answer these questions in my dummy ways tomorrow.

Wednesday, July 13, 2016

FA-u-Q

Thought for the day

"Nothing gives us courage more readily than the desire to avoid looking like a damn fool."

—Dean Koontz (American, 1945—)

Word for the day

Churrasco (n)

Meat cooked over an open fire.

Malice towards none

Is it time to appoint a Rural Economist as RBI governor?

Since, we have already tried market economists, development economists, career bureaucrats and bankers.

First random thought this morning

Close to full marks in quantitative subjects like Mathematics and Physics is fine.

But in humanities?

This is absurd!

This suggests that we still living under the Macaulay's spell. We are not allowing our children to think freely and express their thoughts in their language. We want them to be conformist in the colonial sense.

FA-u-Q

With so many emotions running concurrently, the present atmosphere in the Indian equity market distinctly resembles a traditional Indian wedding ceremony.

The market participants are happy, greedy, fearful, somber, repentant, hopeful, jealous, boastful, swaggering, inebriated, hasty and ruined all at the same time.

This is neither new, nor unusual. Most periods of market surge against all odds have seen witnessed similar scenes. The most recent being 1Q2015 and prior to that 1H2007.

In these times, it is common to frequently hear some uncomfortable questions (FA-u-Q). Overwhelmed with hope, fear and greed, these questions are uncomfortable because I cannot answer those questions with any degree of certainty or confidence in the argument. Some of the questions, I am afraid to hear are as follows:

How much more from here?

The potential upside in a rising market and downside in a falling market are always daily rolling targets. Technical targets are usually conditional (e.g., “if market rises above this level, it could go to that level else…) and generally do not account for exceptional moves. Price targets based on fundamental valuation and historical discounting trends are dependent on materialization of multitude of complex forecast regarding likely revenue, profitability, cash flows, capex, project execution, policy environment etc.

At the close of the market on 12^th July 2016 I could say that if Nifty sustains above 8418 level and manages to close above 8530, we could see it going to 8650 level soon. Else, it would fall to 8328 and then to 8060 level. However, if 1QFY17 results disappoint, GST bill is not passed in monsoon session, CNY devaluation accelerates, Brexit process starts earlier than expected, and/or July sales figures for auto and cement remain sluggish, we may see market correcting sharply.

If this does not make sense, well it actually does not. I am just trying to evade a straight answer to an uncomfortable question.

This stock is 2x in past three month. Is it still a buy?

The broader market indices are at all time high. Over 100 stocks have risen more than 100% in past three months. The question is how much more these stocks could rise?

Again there could be no straight answer to this. I can just remind that the markets are not that inefficient these days. The information arbitrage has diminished materially in past few years. The 'Eureka' movements have to be rare. If these are frequent, there must be something seriously amiss.

Should I buy midcap or large cap

Large cap ‑ midcap-small cap; long term ‑ short term; value investor – speculator etc. is nothing but jargon created to unnecessarily complicate the process of investment and compel investors to seek professional advice.

Stocks like Nestle, Britannia, Colgate, ABB, AB Nuvo, Ashok Leyland, Hind Zinc, BEL, Bharat Forge are termed midcap.

Investors who bought large cap RIL, HUL, Sun Pharma, Bharti Airtel etc. a year ago are regretting. While those who bought micro cap stocks in sugar, textile, cement etc. sectors are rejoicing.

In my view, the approximate correct answer would be buy the companies which are relevant in today’s context, for the period they are likely to remain relevant at today’s price.

Tuesday, July 12, 2016

After all, being fearful is not a bad idea - 3

Thought for the day

"Human beings can always be relied upon to exert, with vigor, their God-given right to be stupid."

—Dean Koontz (American, 1945—)

Word for the day

Egalitarian (adj)

Asserting, resulting from, or characterized by belief in the equality of all people, especially in political, economic, or social life.

Malice towards none

The cabinet reshuffle has at least settled that Ms. Irani and Ms. Bharti are not the BJP's chief ministerial candidate in UP.

First random thought this morning

The media is trying to project the transfer of Ms. Irani from HRD ministry to Textile ministry as 'demotion' reflecting on her poor performance as HRD minister.

I do not understand the logic. Textile ministry has been the mainstay of employment generation in the country since independence. It still continues to be a sector where the central policies are a key determinant of growth. Whereas education primarily being a state subject, HRD minister's role is more advisory, besides being administrating a handful of central institutions and universities.

Moreover, if HRD has JNU, Textile Ministry has NIFT.

After all, being fearful is not a bad idea - 3

In past couple of months, my readers have raised more queries regarding currency than equities. This does not sound unusual to me.

In past one decade or so, our society has been integrating with the global economy at much faster rate than a common man would realize at once. An analysis of kitchen (fruits, pulses, bakery, confectionary, crockery, appliances etc.), kids desk (stationary, bags, books, toys, movies, cartoons, etc.), bedroom (clothes, accessories, shoes, slippers, lights, ACs, TV, wall paper, tiles, flooring), and office space (vehicles, appliances, equipments) etc. would show that imported stuff (including assembled from imported components) occupies prominent space in our daily life.

Mind you, it is not just true for the typical upper middle class urban household. This is in fact more true for a middle or lower middle class semi urban or semi rural household. In fact, I will not be completely off the mark, if I say that the whole Consumer Revolution in India (rising propensity to consume amongst people staying at the middle and bottom of the demographic pyramid) is primarily built around the cheap imports (popularly referred to as "Chinese" in generic terms) of both consumables and durables.

Persistent suppression of CNY by China; intense war between JPY (Japan) and KRW (Korea); fall in global commodity prices; and financial crisis in Europe — at a time when in India (a) affordability and propensity to consume is rising; (b) liberalization of domestic retail trade and foreign trade is gathering pace; (c) foreign investments are being encouraged through FDI route; and (d) INR is relatively stable with one of the best yields amongst EM peers — are certainly aiding the trend.

The precipitous fall in GBP on account of Brexit vote may see another major round of currency adjustments. We have already seen ~2% devaluation in CNY, ~4% devaluation in JPY. INR has however stood its ground. This implies the flood of imported consumable (and durables) is likely to worsen further.

As a consumer its certainly music to my year.

But as a local businessman dealing in domestic stuff, I would be worried. Despite all anti-dumping and other measures, I may be losing my market share to these "imported" stuff. I would envy my fellow businessmen who have moved to trading in and/or assembly of imported stuff.

I would be worried as an administrator also. Structurally, it does not augur well for the country's foreign trade balance. Should a 2013 like BoP crisis recur before Make in India starts yielding results.

Other side impact of currency volatility could be that the technology and process knowledge transfer that had accelerated in past one decade takes a hit as the manufacturing stays back or relocate to Americas; thereby impeding India’s endeavor to transform itself from supplier of raw material and low cost converter — the reliance on imports may rise, whereas the value addition in exports declines.

Also Read

After all, being fearful is not a bad idea -1

After all, being fearful is not a bad idea - 2