Vijay Kumar Gaba

Thursday, September 8, 2016

Bank on banking - 2

Thought for the day

"Pick battles big enough to matter, small enough to win"

—Jonathan Kozol (American, 1936)

Word for the day

Peradventure (n)

Chance, doubt, or uncertainty.

Malice towards none

'K' is a popular word not only in Pakistan but in UP also:

Khan (Azam)

Khap (Jat and Yadav)

Khaat (Congress farm loan waiver)

Kashi (BJP)

Kanshi (BSP)

First random thought this morning

The UP elections have begun with Farm loan waiver (Cong) and free smart phone (SP).

The competition will intensify as BJP and BSP join the fray in next few weeks.

The voters will have really tough choices to make this time!

Bank on banking - 2

Regardless of the sharp gains seen in the stock prices of public sector banks (PSBs) in recent months, they have seriously underperformed their private sector peers. Multiple issues have been keeping investors away from these fallen angels. Though in recent months, some of the issues have been addressed, still investors appear skeptical.

The following five issues in particular have impacted the investors' sentiments insofar as PSBs are concerned.

(1) FCNR redemption: Potentially US$24bn redemption of FCNR deposits received from NRIs in 2013 is due between September and December 2016. It is feared that the redemption may cause material pressure on banks' liquidity & credit growth and may cause high volatility in currency and debt market.

In my view, all these fears are mostly unfounded. These appear premised on the fallacy that Indian banks and banking regulator are highly inefficient and are even unable to foresee 3months forward!

I do not subscribe to this notion and therefore not worried at all about this event. (More on this tomorrow)

(2) Underreported NPAs: The asset quality review mandated by RBI may have taken care of a large part of this problem. My discussions with many bankers and their auditors suggest that in many cases material over provisioning has been made.

In my view, though in the current economic environment one cannot rule out new accounts slipping into red, the problem from hereafter should be a normal business proposition and not a catastrophe.

(3) Capital inadequacy: This is a serious problem at this point in time, but certainly not incapacitating. Many PSBs need material capital infusion to meet the Basel III norms in next 2-3years.

In my view, they should have no problem in raising fresh capital from government or public, provided they are in a position to deploy this capital profitably. This could be a chicken-egg story in the short term, but in medium term it should not be. Those who are profitable get the capital, and those who are not get acquired by big brothers.

(4) Competition from private banks: This is a serious issue and needs to be adequately factored in investment decisions.

I believe, given the dominant market share of PSBs and vastly underpenetrated market, the large five PSBs could survive profitably and grow for next one decades at the least. I am not inclined to look beyond these five for my portfolio.

(5) Credit growth: This is normal business cycle issue and not a structural one. In my view, the credit growth is bottoming and should begin to pick up in next 3-4 quarters.

I would share my views about these issues in detail, over next few days.

Wednesday, September 7, 2016

Bank on banking

Thought for the day

"The answers I remember longest are the ones that answer questions that I didn't think of asking."

—Jonathan Kozol (American, 1936)

Word for the day

Paean (n)

Any song of praise, joy, or triumph.

Malice towards none

Is Big B guilty of breaching the privacy of two young girls by publically releasing a letter written to them by their grandfather?

If the intent was "public good", then the grandfather could have very well addressed the subject letter to all the daughters of this country.

First random thought this morning

I do not understand the paranoia of so called liberals in our country. Why cannot they accept that people have personal likings about things like - how people should dress; what people should eat; what students should study; etc. It is common behavior to consider and propagate one's parochial view as the worldview. Forcing such view (legally, emotionally or socially) might be criminal, but mere suggestion is innocent.

There are enough evidence of so called developed societies enforcing attire (Burkha, Turban etc.) and food restriction through legal means. At least, we have not seen any legal restriction so far, to my knowledge.

Bank on banking

In past three years, the Indian banking industry has witnessed a number of changes in almost all areas of operations.

Many of these changes are operational in nature and would go many miles in improving the operational efficiency of Indian banks.

Some of these changes are structural in nature and have the potential of transforming face of the Indian banking industry to make it competitive in the global market.

The following three structural changes, in particular, are note worthy, in my view:

(a) Technological upgradation: Traditionally the Indian banking industry has suffered from capacity constraints in terms of man and material. Introduction of technology based tools like Unified Payment Interface (UPI) and UIDAI based KYC have made it possible to scale up the business both in terms of geographical reach and number of customers.

Increased use of technology makes the implementation of financial inclusion objectives thus facilitating the exponential growth of banking industry (secure remittances, improved social security, higher small savings, lesser need for holding cash, etc.)

Use of technology in banking makes delivery of government subsidies and grants efficient through direct benefit transfer scheme (DBT) thus materially improving the systemic efficiencies both on fiscal and monetary sides.

(b) Encouraging competition: Removal of entry restrictions and making banking licensing a simple over the counter (OTC) affair has been a tremendous effort by both the government and the regulator. We have seen how the face of services like civil aviation, telecom, power generation and distribution, highways etc. has changed over past two and half decade. Expecting a similar change in the banking sector over next decade would not be an exaggeration.

There could be an argument that with higher and deeper use of technology, we may not need more banks. To some these two may even appear incongruent to each other. In my view, these two changes are perfectly complimentary to each other and much needed.

As we have seen in civil aviation and telecom, each new player brings a new set of ideas, innovation and rise in competitive intensity. Some become large in generic services and some choose to become niche players in selected areas. In due course the best survives and the inefficient fades into oblivion.

(c) Bankruptcy law: Implementation of a practical and modern bankruptcy law is also a major structural change in the operation of the Indian banking industry. On one side it would act as a deterrent to the unscrupulous businessmen who have been routinely misusing the banking system and legal system; on the other hand it would encourage the bankers to take the required risk without fear.....to continue

Tuesday, September 6, 2016

Nifty: All set for mount 9k

Thought for the day

"The cause of homelessness is lack of housing."

—Jonathan Kozol (American, 1936)

Word for the day

Abeyance (n)

Temporary inactivity, cessation, or suspension

Malice towards none

Does AAP need to be taken seriously in Goa and Punjab elections; or it is merely a Delhi phenomenon?

First random thought this morning

Metaphorically speaking, presently the global economy is just like Dead Sea. Nobody sinks in this, but chances of any life surviving in this are remote. Floating with your eyes and mouth shut is the only option.

These days it is becoming marketed aggressively as a popular exotic health tourism destination.

Nifty: All set for mount 9k

Nifty moved higher last week, trampling many resistances on it way. However, given that the rally was purely liquidity driven with not much support from data side, the up move lacked conviction.

Volumes were not commensurate with the level of activity. Implied volatility crashed to further lows. Market breadth was absolutely flat.

Regardless, technically speaking, Nifty is poised to move past 9000 mark sometime in next 8 weeks. Only meaning full resistance now exists around 8990 level. A strong support has developed in 8606-8630 range.

On bank Nifty, the resistance at 20k has weakened materially last week. The next 1000 point move could be fast and furious. A good support has developed in 19340-19400 range. However, the strong support remains at 18600 level.

Friday, September 2, 2016

Hope prevails!

Thought for the day

"A budget tells us what we can't afford, but it doesn't keep us from buying it."

—William Feather (American, 1889-1981)

Word for the day

Auriferous (adj)

Yielding or containing gold.

Malice towards none

The perfect storm:

- The government would want Telcos to participate aggressively in the forthcoming spectrum auction.

- Banks would be reluctant to lend aggressively to Telcos given the intensifying tariff war and poor revenue growth visibility.

- Telcos may not like to bid aggressively, but to survive competition they would need abundance of spectrum and tower infrastructure.

First random thought this morning

All national parties ally with the smaller parties with parochial agenda for electoral gains. But after winning the elections they find these smaller parties' agenda regressive and want them to abandon it.

This is not gonna happen, Sir!

You are condemned to live with it and suffer.

Hope prevails!

The market was unusually indifferent to the below expectation GDP data on Wednesday evening. No intense discussions in the TV studios; no press conference or media release from PMO or the finance ministry; no significant criticism from the opposition parties; and almost no reaction of benchmark stock, currency market or bond market. This is a classical case of bull market.

The participants are either ignoring poor data points or deliberately deriving positive inferences from it (rate cut etc.), knowing well that in a world flirting with the specter of recession and deflation, high growth will be hard to come by; regardless of what the government and its planners may wish or claim.

I have been insisting that ~7% sustainable economic growth (5.5% as per the old methodology) would be a truly great achievement under the current circumstances, provided we can make it inclusive.

Aiming for 8% and higher growth by focusing on the top 20% population would solve no problem at all, in my view.

From the data released on Wednesday, it is clear that so far there is no respite to the rural populace which has been suffering from severe drought for past two years. The standing crops are good. But these may not results in immediate improvement in the rural income.

For one, the debt at household level has swelled in past two years. A loan waiver by banks may be a partial relief as still a dominant part of the debt could be outside the formal banking channel.

Secondly, like the last onion crop, many other vegetable crops may not fetch remunerative prices to the farmers. Oil seeds, pulses may also see lower realization.

A lot of hopes are being pinned on the seventh pay commission and OROP payouts. As the payments are being made in the supposedly inauspicious month, the spending may occur only in October, i.e., 3QFY17. My informal inquiries from the trade channels are suggesting that except for automobile, most other consumer durables (and staples also) are witnessing inventory rundown. Acute shortage of cash in the trade channel, poor capacity addition and widespread floods in many parts of the country could be the possible reasons.

The Christmas shipments of exporters are almost done. What I could gather from a few exporters is that the season is not great on any parameters.

The leverage for the government to keep spending is much lower now. With fiscal targets almost breached, and budgeted spectrum revenue under cloud, the growth in government revenue expenditure may not sustain. So it would prudent to keep the expectations for 2QFY17 growth numbers also at moderate level.

On positive side, the grand plans are beginning to take off. 3Q could see positive momentum on the investment side.

I would not be surprised if an accounting jugglery or shifting the goal post is used to show data in good light. After all we are competitors to China!

Thursday, September 1, 2016

Not much to worry this morning

Thought for the day

"If you're naturally kind, you attract a lot of people you don't like."

—William Feather (American, 1889-1981)

Word for the day

Lucubrate (v)

To work, write, or study laboriously, especially at night.

Malice towards none

How could a city be termed "relatively" safer for women?

First random thought this morning

A dear friend invoked my inquisition about the transmission of improving macro headlines to the household level. My impromptu reaction was - "it may take few more quarters".

However, a few hours later when I reflected back, I discovered that I have no basis to comment on this. I decided to check with some experts and their answers deepened the intrigue; motivating me for a deeper scrutiny.

If you have any thoughts on this please let me know.

Not much to worry this morning

Continuing with my fantasy about the Endgame for the burgeoning bubble in the global financial markets with trillions of dollar worth of treasury bonds yielding negative returns (see No black swan here and Alice in the wonderland), I would like to share my current matrix with the readers.

Needless to say, it's very crude, mostly intuitive and evolving in nature.

My gut feeling suggests that we are at least 4-5 years away (could be 10yr also) from the final day of reckoning. Therefore, I have enough time to deliberate over the signal mechanism and develop a working model that will prompt me sufficiently in advance to get a bunker.

Currently I have the following ten indicators on my radar. With time it would only increase.

1. An alternative currency, e.g., Bitcoin, accounting for close to 5% of the global trade settlement.

2. Massive unrest in Germany, empowering the ultra nationalist forces followed by a referendum demand for Grexit (G for Germany this time).

3. Massive devaluation of EUR and/or JPY.

4. Contempt of a UN resolution by one of the permanent member of UNSC.

5. A top economy withdrawing from IMF and World Bank.

6. Crude oil trading below US$15/bbl for more than a month.

7. Gold trading below US$650/oz for more than a month.

8. US-German benchmark 10yr yield spread rising above 500points (currently 160 points).

9. Either California or Texas demanding a referendum for secession from USA.

10. A colossal damage to human life due to a natural calamity or epidemic outbreak, killing more than 100k people in a short span of time.

In my eccentric view, any one of the ten events materializing in next 10years will trigger the Endgame for the current "unconventional" monetary policies.

Consequently, among other repercussions, huge debt write offs (80-100%), devaluation or substitution of currencies, realignment of geopolitical forces, restructuring of global trade arrangements, and immigration & neutralization policies will follow.

I strongly believe that the world will be a much better place to live after the storm passes.

If you ask me - "anything needed to be done today?"; my answer would be a big NO.

Wednesday, August 31, 2016

Alice in the wonderland

Thought for the day

"No man is a failure who is enjoying life."

—William Feather (American, 1889-1981)

Word for the day

Mirabila (pl noun)

Marvels; Miracles.

Malice towards none

Is India giving away too much space to US or just allowing US its due space, correcting historical anomalies?

First random thought this morning

Yesterday a leading national newspaper prominently carried the news of Nupur Talwar, mother of Aryushi Talwar, getting three week parole for attending to her ailing mother.

This in my view aptly reflects the degeneration of mainstream media.

Alice in the wonderland

In my endeavor to set a crude matrix that will provide some sort of signal to get into the bunkers before the lightening does strike, I have been reading the works of many experts who are acclaimed for having seen the 2008-09 global financial crisis well in advance.

On the basis of my impression from their works, I may classify them in five broad categories:

(a) Fearsome: These are large investors and seasoned money managers who have serious stakes in the financial markets. They are fearful about the inevitable collapse, but have chosen to stay invested. Naturally they are invested in so called safe havens, driving the value of USD, CHF, US and German treasuries, etc. to bubble levels. The more they are afraid, the more air they are pumping into the bubble.

(b) Fear mongers: These are mostly unscrupulous bankers, economists and analysts who are consistently creating an environment of fear amongst various market participants and stakeholders to maximize their gains. Based on their forecasts, many a times unsubstantiated, they are able to pursue decision makers into a transaction that is mostly unnecessary.

(c) Fearless: These are mostly money managers and small to midsized traders who are always there to take advantage of greed & fear inequilibrium in the market. These mostly move around the globe in herds, acting in tandem. Their entry and exit in an asset class, market or geography causes massive rise in volatility.

(d) I said so variety: These are mostly academicians who propagate multiple, often vague, inadequate, inconsistent and/or self contradicting, economic theories in the market so as to claim the status of an Oracle at a later date. I any event, but mostly collapse, they proudly claim "I said so". Well funded by public money, mostly, they are at no loss situation, in any eventuality.

(e) Data dependent: These are mostly official statements of various central bankers, global financial institutions, and governments. These are expressed in extremely measured words and are said to be data dependent. Though watched carefully for each word and punctuation mark in some cases (e.g., US Fed), in recent time these have lost their credibility. Mostly the fearless type use these statements to further their cause in the market.

From my careful readings of various statements, reports and writings of a number of experts from the said five categories, I have concluded that most of them are as clueless about the timings and immediate trigger for the Endgame, as me or any of my readers.

That is obviously not a matter of comfort for me; but it is motivation enough to break away from the popular wisdom and develop own matrix and signals. Right or wrong - only time could tell.....to continue

Tuesday, August 30, 2016

No black swans here

Thought for the day

"Every social injustice is not only cruel, but it is economic waste."

—William Feather (American, 1889-1981)

Word for the day

Venial (adj)

Excusable; trifling; minor: a venial error; a venial offense.

Malice towards none

Does a brilliant performer in any field really need a medal or award for recognition?

First random thought this morning

Being traumatized by frequent call drops at my home, I reluctantly decided to take few steps back and apply for a MTNL fixed line basic telephone. And it was just a beginning of massive surprise.

I applied by filling a simple online form (no documents and no fees). Within 24hrs two executives of MTNL were at my doorsteps, very humbly requesting for an address proof, ID, photograph and Rs. 500 as fee. They insisted that I just sign the form they had brought and they will fill it up themselves from my address and ID documents. Within 48hrs my telephone was ringing and I was free from the agony of frequent call drops!

No black swans here

The US federal Reserve Chairperson Janet Yellen very bravely asserted in her latest speech that “case for an increase in the federal funds rate has strengthened in recent months”.

The skeptics are taking it for an academic hypothesis; ruling out any action in the near future.

The market participants are divided in their opinion. In my view, this division will likely keep market in its current state of indecision till 21-22nd September when FOMC meets next decides on the Fed policy rates. It is entirely possible that we see some sell off in couple of days prior to the decision day.

In my extremely parochial understanding of the global economics, regardless of a token hike here and there, I find it hard to see any case for any material hike in interest rates even in 2017.

In fact, the case appears to be that even a token hike might have to be supported by adequate monetary easing to support the feeble economic momentum that we see in the USA.

Therefore, I am not at all worried about a 25bps rate hike (not my base case) on 22nd September. What I am worried about is the ponzi in the bond market, that has already assumed alarming proportions and burgeoning by the minute.

To quote a recent post of David Stockman:

"...the global bond market has become a giant volcano of uncollectible capital gains. For example, long-term German bunds issued four years ago are now trading at 200% of par.

Yet even if the financial system of the world somehow survives the current mayhem, the German government will never pay back more than 100 cents on the dollar.

What that means is there will eventually be a multi-trillion dollar bond implosion as speculators and bond fund managers alike scramble to cash-in their capital gains at the first sign that the global bond markets are breaking and heading back to par or below. And it is not just the “winners” who will be stampeding for the exists." (for full post see here)

In my view, everyone knows the endgame. It's going to be a disaster of mega proportion for the savers, pensioners, investors, global financial markets, governments and anybody else one could name. Therefore, this event, whenever it occurs will not qualify to be a black swan event.

The winner would be the one, who could see the first signs of the beginning of the end. I am yet to read or hear any intelligent ideas on this topic; though billions of reams of papers and terabytes of virtual data has been consumed on the related guesswork.

Now when everyone is doing it, why can't I. So let me try it in next few days.

Monday, August 29, 2016

Nifty: near term sluggishness, but no signs of a collapse

Thought for the day

"An invitation to a wedding invokes more trouble than a summons to a police court."

—William Feather (American, 1889-1981)

Word for the day

Truepenny (n)

A trusty, honest fellow.

Malice towards none

Task force to win Olympic medals!

genius!!

Ain't it?

First random thought this morning

The boisterous herd of global traders and punters has found a new worrytoy in the Italian constitutional referendum, to play with. The referendum is likely to take place in late November.

This is after Brexit did not play exactly the way this herd may have wanted it to; and Trump appears offering much less resistance to Hillary, than earlier anticipated.

Italian referendum is being marketed as critical for EU survival.

Nifty: near term sluggishness, but no signs of a collapse

The momentum in the market has completely collapsed, as the market participants wait for a material trigger.

As suggested last week (see here) the market participants, and hence markets, may continue remain in the wait'n'watch mode for few more trading sessions.

In the mean time Nifty is close to completing a good correction on the daily charts, obliterating most of the overbought conditions. 8490 on closing basis is a strong support on daily charts.

The corrective formations on the weekly charts are also showing encouraging signs. Despite three consecutive negative weekly closings, there is no sign of a collapse taking place there.

I shall be watching India VIX and volume charts closely for pick up in the momentum. A bottoming out in VIX, which is at almost lowest level in two years, shall trigger a 10% very fast move in the market.

My wager, like the majority view, would be on an the up move.