Vijay Kumar Gaba

Tuesday, July 12, 2016

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

"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

Monday, July 11, 2016

Nifty willing to move up, waiting for some tailwind

Thought for the day

"Somebody asked me about the current choice we're being given in the presidential election. I said, Well, it's like two of the scariest movies I can imagine."

—Dean Koontz (American, 1945—)

Word for the day

Velleity (n)

A mere wish, unaccompanied by an effort to obtain it.

Malice towards none

Will adopting Calendar Year as Financial Year help the cause of "Ease of Doing Business" and "Integration of Indian Economy into Global Economy (Globalization)"?

First random thought this morning

Traditionally popular Hindi films have highlighted the contemporary trends and problems, like gold smuggling, food hoarding, drug abuse, unemployment, Naxalism, terrorism, mafia dominance, corruption, child and women abuse, etc.

The glamorization of traditional sports like Hockey, running and wrestling in recent films indicates that these sports are regaining their popularity. Whatever the reason, these have the potential to be developed as a major source of employment and state revenue (entertainment tax and tourism).

Nifty willing to move up, waiting for some tailwind

Nifty consolidated last week, ending almost unchanged from the previous week. Though both domestic and foreign funds were net sellers, the non-institutional buying supported the market well. As suggested last week, the Greed continues to be dominant sentiment at present.

This week also most of the action may be witnessed in the broader markets.

Nifty is placed much better as compared to two week ago in terms of trading indicators. However at present it lacks the required momentum to make a decisive move in either direction.

The present consolidation pattern may continue this week also. A risk on trade in global market on the back of strong US job data and likely further monetary easing by ECB and BoJ, could provide some tailwind.

Positive developments on GST legislation, a couple of result surprises could add to the momentum in the following week.

For now, Nifty has a strong support around 8065 level and faces resistance in 8388 -8418 range. Two consecutive close above 8418 may take Nifty to 8560-8630 range in no time. For Bank Nifty a good support exists at 17300 level. A close above 18460 may take it beyond 19K mark soon.

Friday, July 8, 2016

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

Thought for the day

"If I were to do a foundation, it would be to promote solar energy. And I'm worried about drilling for oil. I think it is harming the earth, 'cos it drains the layer of oil under the surface, and that could be causing earthquakes. It's like we're giving the earth arthritis. I don't know if that sounds crazy."

—Debbie Harry (American, 1945-)

Word for the day

Remontant (adj)

Blooming more than once in a season.

Malice towards none

Why Priyanka Gandhi Vadra should be a matter of debate - within and outside Congress?

First random thought this morning

A serious socio-economic reform would be to "Nationalize the rituals of birth, marriage and death."

Given that a large part of the distress amongst lower socio-economic strata could be traced to the obligatory spending on these rituals, government taking over these rituals would rid them of serious financial burden. On the side, it might end the profligacy of well-off who splurge mindless on these rituals, for the sake of vanity.

Readers' thoughts are welcome on this subject. Would write in detail soon.

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

The unconventional methods used by the influential global central bankers since 2008, have definitely complicated the context of financial markets.

As I have stated earlier also, for a simpleton like me who:

(a) does not understand the economics beyond its first lesson which says all economic decisions involve a trade off and price of things having economic value is determined by their demand and supply at that given point in time;

(b) does not know how to simulate data on Microsoft Excel Sheet to suit my likings;

(d) seriously believes that numbers invariably follow the good story

The more I try to comprehend how the movement in global currencies and bond yields would impact my investment portfolio which is largely India centric, the more I feel disillusioned.

Unfortunately, the current state of affair is that movements in global currencies and bond yields have become an important factor to analyze in construction and maintenance of an investment portfolio - regardless of country you live in and asset class you invest in. From precious metals to agro commodities, from real estate to bank deposits and from equities to bonds, the prices and return on all asset classes across world is being impacted.

An overwhelmingly large majority of global commentators, market analysts, economic thinkers and money managers are portending a bloody end to the current mess.

As I said yesterday, history is providing no guidance at all in the present context; since noting today is like anything in the history.

In four decades since 1976, investment grade bonds have provided 7.47% CAGR with very little volatility. S&P500 has also returned over 3% CAGR in this period, though with a little higher volatility as compared to bonds.

The reputable Bill Gross of Janus capital, in his recent communication quoted from GMO’s Ben Inker communication to their clients "while it is obvious that a 10-year Treasury at 1.85% held for 10 years will return pretty close to 1.85%, it is not widely observed that the rate of return of a dynamic “constant maturity strategy” maintaining a fixed duration on a Barclays Capital U.S. Aggregate portfolio now yielding 2.17%, will almost assuredly return between 1.5% and 2.9% over the next 10 years, even if yields double or drop to 0% at period’s end. The bond market’s 7.5% 40-year historical return is just that – history. In order to duplicate that number, yields would have to drop to (-)17%!"

Gold bulls are obviously enthusiastic. But perhaps they are borrowing too much from history. .....to continue to Tuesday

Thursday, July 7, 2016

After all, being fearful is not a bad idea

Thought for the day

"It's amazing to me to see how bands evolve and how they take all their influences and come up with their own sound."

—Debbie Harry (American, 1945-)

Word for the day

Transmogrify (v)

To change in appearance or form, especially strangely or grotesquely; transform.

Malice towards none

What's reason for Jayant Sinha's transfer from Finance to Civil Aviation:

(a) over-exposure to media;

(b) his father's criticizing PM;

(c) poor performance;

(d) needed at Civil Aviation as new policy gets implemented;

(e) All of the above;

(f) None of the above

First random thought this morning

Anil Madhav Dave is appointed new Environment Minister of the country. Unlike Mr. Javdekar, Mr. Dave brings baggage to the ministry. He has been a green activist, closely associated with river conservation. Like Mr. Javdekar he is also an RSS parachrak, but unlike his predecessor, Mr. Dave proudly proclaim his allegiance publically.

I guess, industry might experience some conflicts in the Green Ministry in coming months.

After all, being fearful is not a bad idea

Wonder why would someone buy a 30year bond with negative yield to maturity (YTM), implying that after 30years he expects to receive less money in nominal terms than he is investing today. As per various estimates globally over US$30trn worth of global bonds are trading at negative YTM on nominal basis. Besides an overwhelmingly large portion of ~US$225trn global debt is trading at close to 1% YTM (meaning negative real returns).

There could be several reasons for someone to invest in a negative YTM security. For example, if one—

(a) Expects inflation to stay negative for a long period of time, thus enhancing the value of money; or

(b) Does not have enough space at home to keep currency or his/her home is not safe for keeping his money; or

(c) Does not have faith in present days currencies and believes that the redemption will occur in a different & stronger currency; or

(d) Does not expect any debasement of currency in which the bonds are denominated; or

(d) Believes that a bigger fool is waiting outside his door, ready to buy the bonds at even higher price than what he is paying. (This is my favorite reason!)

Whatever the reason, one thing is certain that this is an anomalous situation that cannot sustain for long; although as someone said - "irrationalities may last longer than expected".

As a tiny investor concerned mostly with the investments in INR assets, I have little reason to be afraid.

· I still get one of the best available nominal yields globally on my debt portfolio.

· Thanks to the inflation hawk as RBI governor, my real yield is also positive.

· My home currency (INR) is stable, and has in fact appreciated against a host of currencies.

· My home economy is being widely touted as an oasis in the growth starved world.

· I have reason to believe that my government may default on its obligations. (In fact India is one of the handful of countries which have not seen any sovereign defaults in the recorded history. All major countries, including USA, UK, Russia, etc. have experienced sovereign defaults at some point in time history.)

But the fact is that most of us, including myself, are scared. Most of this fear is emanating from the uncertainty and helplessness, since the conditions are unprecedented and the history books are not providing any pertinent guidance......to continue

Tuesday, July 5, 2016

Sum of the Parts

Thought for the day

"The word 'iconic' is used too frequently - an icon is a statue carved in wood. It was shocking at first, when I got that reference. It was a responsibility, and it's impossible to live up to - you're supposed to be dead, for one thing."

—Debbie Harry (American, 1945-)

Word for the day

Supererogatory (adj)

Going beyond the requirements of duty.

Malice towards none

Mostly sycophants and court poets do serious harm to their masters by imposing (undeserved) greatness on them.

First random thought this morning

Uttrakhand is struggling again. Mother Nature is furious. Deities do not want millions of revelers to crowd their abode with all their paraphernalia - SUVs, packets of potato wafers, cola cans, beer bottles, etc.

Why the Religious cannot appreciate this simple fact that Deities made the faraway, secluded, and difficult to reach mountains their abode because they wanted the pilgrimage to be an act of penance and not picnic.

Sum of the Parts

Last week I spent two nights walking the streets of Old Delhi. The atmosphere there was amazing. The aroma of great food supplemented the peoples' enthusiasm and gaiety well. I did not see any reflection of Dhaka, Brussels, Istanbul, Turkey or Kairana there. People from all faiths and socio-economic strata mixed well and all appeared happy.

This morning, while leaving for school, my daughter did not forget to remind that I need to book ticket of "Sultan" starring Salman Khan, first thing in the morning. "For me too", my wife a devout Hindu, shouted from the puja room.

From my various trips across the country and overseas, I have discovered that at individual level, people of all faith and cultures are much more friendly and compassionate to each other at individual and family level. But this goodwill is not necessarily shared at a wider society or community level.

A classic case in point could be Dr. Subramanian Swamy who may share good relations with his Muslim son-in-law but still show hostilities to the Muslims in general.

I find that the sum of the parts (SOP) of Indian society is much superior, harmonized, cohesive and acceptable than the aggregate picture, especially the one presented in media discourse of political narratives.

Despite occasional flaring up of passion due to localized events, Indian people are more or less at peace with their immediate neighbors. and friends from different faiths and communities.

Although SOP has been a popular method of valuing conglomerates with interest in diversified businesses; it has not yielded the desired results in most cases.

Perhaps drawing courage from the social context, analysts have traditionally valued conglomerates, like L&T, Jaiprakash Associates, ITC, HCC, AB Nuvo, etc. on SOP basis. The results have been mostly disappointing.

In most cases, we have seen the inferior parts impeding growth of the relatively superior parts. The cross subsidization of low yielding businesses by the parts with superior return profile has mostly diminished the overall performance, chronically.

Unlike the social context, where the SOP have complemented each other very well and kept India together, democratic and overall progressive, the SOP method of growth has not worked in business sphere.

No wonder we have seen frequent "de-merger" of earnings dilutive businesses and "sale of non-core assets" deals. Bankers, consultants and lawyers have certainly made much more money in this whole SOP process. Unfortunately, the same cannot be said about the lenders and shareholders.

As the economy seeks to turn the corner, we will see a great deal of newsflow on business re-organization and "value discovery" through SOP method. I chose to remain oblivious to all such great discoveries. I certainly do not mind taking the risk of missing on a few multi-baggers.

Monday, July 4, 2016

Nifty determines to move up as greed makes a comeback

Thought for the day

"You always fall for the rascal or the guy who's got a little bit of the devil in him. You can't help it."

— Debbie Harry, (American, 1945-)

Word for the day

Towser (n)

A big dog.

Malice towards none

Are you looking to invest in gold @$1340/oz having refused to buy it at US$1000/oz a few months ago?

First random thought this morning

There is an urgent need to democratize the politics in our country. Though our constitution mandates a democratic government, most politicians behave like feudal lords.

Elected representatives wants to be credited, praised and acknowledged for getting drains cleaned, getting pavements cleared, covering manholes, planting trees (all at people's expense). Congress VP never misses a chance to remind people that he "gave" them food (Food Security), education (RTE), employment (MNREGA), etc. otherwise all Indian were doomed to die hungry, illiterate and unemployed!

Nifty determines to move up as greed makes a comeback

Brushing aside the two "Exits" and the derivative "Expiry", Nifty managed to close at the upper end of its range (7930-8330) of past five weeks. This happened despite lower institutional activity and overall volumes.

The most striking feature of market in past 10 trading session is the return of "Greed" trade with a vengeance. Much deeper and enthusiastic retail participation is evident from the sharp outperformance of mid and small cap stocks.

Instinctively I know that this is usually pre-cursor to a meaningful correction.

Nonetheless, after having weathered significant intraday volatility, that helped correcting many overbought indicators, Nifty looks good for rise to 8560 level in next few weeks. Good support on the downside exists at 8065 level.

The target on Bank Nifty would be 18600 with a strong base around 17375.

Though the most of the activity shall be seen in the broader market, a cautious trade with regular profit taking and strict stop loss would be in order.

Friday, July 1, 2016

A clarification

Since morning, I have received numerous mails "accusing" me of over-simplifying things in relation to the political changes taking place in European Union.

May I take this liberty to address all accusations collectively & conclusively, and clarify as follows.

(a) I do firmly believe that UK referendum has the potential to become a watershed event in the history of modern world. But I strongly refuse to believe that it will push the global community back into the dark ages. As I wrote earlier, in my view it is not a problem but part of the solution.

(b) I have strong reasons to have an economic view that diverges from that of the global investment legends like George Soros and Mark Mobius. After all I have benefitted from not following them in past 10 years. Despite extremely persuasive arguments - I did not believe in China story, hyperinflation due to QE, weaker bonds, end of USD, commodity super-cycle, Grexit, blah blah. I did not plunged into Indian equities immediately after PM Modi moved to 7RCR, as advised by many of them.

Neither am I buying Gold now.

(c) Mumbai is perhaps one of the most filthy and unsafe city in the world. Despite Shiv Sena's anti immigrant movement, obscene realty prices, higher taxes, dismal security apparatus despite many terror attacks, floods, poor infrastructure and abundant filth - it has not diminished a bit in its status as India's financial capital in past many decades. I do not understand why would London do? Singapore & Dubai have been there for decades!

It is not over-simplification. It is in fact little complicated.

Ask a sociologist and anthropologist. They will tell you how a "CITY" takes shape and how people grow their roots in these cities. Politics and terror can't uproot them. It takes Mother Nature's strong intervention to end the importance of Rome, Agra/Sikri, etc.

(d) In my view, the magnitude of transformation must be measured from a single criteria - how many "lives" it does impact seriously?

History suggests - any event that impacts relatively smaller number of "lives" usually does not have transformative impact on the global order. I believe financial and political crises should also be evaluated by this criteria only. It is too early to assess how many "Lives" UK divorce from EU will impact seriously. If it does as expected impact millions of refugees and immigrants, it will qualify to be a transformative event having lasting impact on the global order - not necessarily negative.

I would also like to mention that I am NOT LIKING Mr. Market's complete disdain for the UK "Leave" vote. An apology may be in order. Sooner the better

Blind Men and the Elephant-4

Thought for the day

"I was a pretty good fighter. But it was the writers who made me great."

— Jack Dempsey (American, 1895-1983)

Word for the day

Nonpareil (n)

A person or thing having no equal.

Malice towards none

It will be really unfortunate if SC now decide to lift ban on registration of larger diesel cars in Delhi.

This will reflect how morality is often shadowing legality these days.

First random thought this morning

The announcement regarding implementation of 7th pay commission recommendations has met with varied reactions, expectedly.

Employees are dissatisfied and want more. Economist feel the massive cash payout could be inflationary and result in undesirable fiscal pressure, especially on State Government which are likely to miss fiscal targets due to signing the UDAY deal. It is feared that it may also worsen the already poor health of many PSUs.

The industry is happy, expecting the beneficiary employees to indulge in shopping spree. Equity market shares their optimism. Bond traders are uncertain.

Blind Men and the Elephant-4

In the aftermath of UK referendum vote to leave EU, numerous pessimistic forecasts have been made. The voices of optimism have been few and feeble.

Based on assumptions that post separation from EU, UK government will shut out all multinational businesses, fence all its borders, impose heavy taxes on immigrant workers and foreign businesses; and EU will erect strong barriers for trade and labor movement to & from UK, both GBP & EUR will decline materially - various forecasters have portended 0.5-0.75% decline in UK GDP, exodus of businesses from London, material in rise in cost of doing business and hence lower margins for businesses selling goods and services in Europe (including UK).

Instinctively, I find these assumptions contrary to the conventional wisdom. I believe, post break-up, British government will be more open, receptive, and congenial towards foreign businesses and skilled immigrant labor, for two simple reasons—

(a) The fear of recession, should economic activity slow down any further; and

(b) A point to prove that UK is better off outside EU.

Remember we are talking about a country deeply divided on political ground, with almost one fourth of the population riding guilt of having voted "Leave" for fun. Good economics is the only thing that could keep people together there.

Talking specifically about impact on Indian businesses, a lot has been said about Tata Motors and IT companies. The arguments of analysts based on simulations on Excel Sheets look impressive. But being a small investor, I can certainly afford to ignore deep analysis and apply my innocent logic.

I fathom that the separation of UK from EU will entail humongous IT work - modifying systems throughout EU, and other parts of the world also. Dislocation of some businesses both from UK and EU would also entail IT fix. Banks, airlines, insurers, VISA offices, et. al. would need to modify their IT systems and infrastructure. Besides, UK may enter a number of new treaties and arrangement, new alliances may develop, which would need IT services to implement. This could generate billions of dollars of new business for Indian IT companies. The cost of opening a new EU headquarter in Vilnius, Warsaw, Budapest, etc. may not be prohibitive in comparison, especially if you could borrow at rate close to zero and pay costs in a cheaper EUR. No need to open shop in Paris or Frankfurt.

Similarly, I am yet to find a JLR buyer who would be exactly bothered about the duty element of cost. On the contrary, there could be some buyers who may precipitate their buying, to a date before effective date of divorce, for the sake of convenience. The price of JLR may be lower due to cheaper GBP, but so would be costs and value of debt. JLR may be more competitive than its German competitors if GBP falls more relative to EUR.