Vijay Kumar Gaba

Monday, September 26, 2016

Nifty: Breakout in October?

Thought for the day

"Why can we remember the tiniest detail that has happened to us, and not remember how many times we have told it to the same person."

—Francois de La Rochefoucauld (French, 1613-1680)

Word for the day

Eutaxy (n)

Good order or management.

Malice towards none

Winter is certainly arriving early this year and promises to be harsh

First random thought this morning

Take one common person from the streets of Lahore and Delhi.

I will wholeheartedly support all war cries against Pakistani people, if any one of the studio experts, warmongers rallying at social media and feudal lords of Mumbai, could tell me any difference between these two persons.

Nifty: Breakout in October?

On past many occasions we have observed that the change in monthly average trading value is a useful leading indicator for Nifty movement in the coming month.

Any divergence in the monthly movement of Nifty and monthly average traded value is usually bridged in the next following 1-3months, depending on the movement in VIX.

If VIX also moves sharply with Nifty, then the divergence may take little longer to bridge. Otherwise, the convergence is seen in 4-6week period.

The following chart of Nifty movement since February this year shows that the convergence An analysis of past six months would show that the divergence is usually bridged in the following 4week period.

MTD in September 2016 Nifty has gained 1% from August closing, whereas the MTD average trading value is higher by 2% MoM. Presently the value of Nifty (8831.55) and monthly trading average for September MTD (8831.52) are the same. Any further correction in Nifty from here will lead to widening of divergence and improve the chances of a converging pattern next month.

I see the up move facing some resistance around 8866 level and a strong resistance around 8978-8999 range. 8774 is immediate support and 8630-8640 a strong support base.

A close above 8774 this month shall see Nifty breaking 9K barrier in next 4-6weeks and mark a new high, before a meaningful correction sets in.

As suggested last week (see here) Bank Nifty appears to be losing momentum. Watch closely for a weekly close outside 19560-20340 range to decide the next course of action. Near term banks are avoidable for trading.

Friday, September 23, 2016

Another false alarm

Thought for the day

"There are various sorts of curiosity; one is from interest, which makes us desire to know that which may be useful to us; and the other, from pride which comes from the wish to know what others are ignorant of."

—Francois de La Rochefoucauld (French, 1613-1680)

Word for the day

Eponym (n)

A person, real or imaginary, from whom something, as a tribe, nation, or place, takes or is said to take.

Malice towards none

Tell me more about Brad Pitt and Angelina.

Fed, BoJ, Uri, Trump-Hillary, Cauvery, RBI et. al. can wait.

First random thought this morning

It feels miserable to hear some of the senior retired Army Generals sitting in TV studios and seeking a jingoistic response from the government to the cowardly terrorist attack on Indian Army.

These officers seem to be suggesting that for decades Indian Army has never retaliated to the unprovoked killing of our soldiers from the elements transgressing from across LoC.

This is totally unbelievable. Anyone who has spend even one hour at a border post would know that the Men posted there do not necessarily seek permission from New Delhi for responding to a fire from across the border.

Another false alarm

In past few years many experts have highlighted that the uncertainty and fear created by US Federal Reserve and its officials through their official and public utterances is causing more harm to the global markets than the eventual policy direction probably would. Through its latest statement also, Fed has left the markets guessing. Giving people on both sides of the line some reasons to be excited.

On the other hand the Bank of Japan (BoJ) and the European Central Bank (ECB) are not leaving anything to the imagination of analysts. They are consistently highlighting that the economic conditions continue to be challenging, requiring continuous monetary support. Both have pledged "whatever it takes" stance on almost every available opportunity.

The fourth large pillar of global markets - China, has never been vocal about its policy stance. However, it is seen that in past few years, the response of the People's Bank of China (PBoC) has mostly been reactionary - adjusting its policy stance to the stance of other global central bankers. Though the de-valuation of CNY has been a matter of concern for competing economies, of late not much noise has been raised over it.

Given the high degree of economic interdependence of US, EU, Japan and China over each other, anyone material divergence in monetary policy stance could cause potentially cause serious disruptions in global markets.

So leaving 25bps here and there, expecting any major divergence in next couple of years at least would not be reasonable, in my view.

The following three point that stand out unambiguously (from the point where I stand) from the latest policy decision of the Bank of Japan and the Federal Reserve of US may be noteworthy:

(a) The unconventional monetary policy tools being used by various global central bankers have mostly lost their effectiveness. Japan and most part of the Europe continue to struggle with poor economic growth and lack of inflation, despite near Zero interest rates and trillions of dollars worth of money printed and injected in the financial system since the last global financial crisis, popularly symbolized by the collapse of US investment bank Lehman Brothers.

(b) US economy appear stable, but not growing at desirable pace. In the absence of support from other larger economies like China, Japan and EU - the pace of US economic growth is expected to normalize much below the levels seen in past few decades. The "new normal", as some prefer to call it, is materially moderate than the historical averages. Whatever growth may come, it would be mostly through productivity gains rather than higher demand. The desired trajectory of Inflation therefore could be difficult to attain on sustainable basis.

Thursday, September 22, 2016

NDA may not be learning from UPA's mistakes

Thought for the day

"We would frequently be ashamed of our good deeds if people saw all of the motives that produced them."

—Francois de La Rochefoucauld (French, 1613-1680)

Word for the day

Chimerical (adj)

Wildly fanciful; highly unrealistic, e.g., a chimerical plan.

Malice towards none

Now if the government has decided to change some conventional datelines, why not adopt calendar year as uniform financial year for businesses and the government. If for nothing else, for the sake of ease of doing business!

First random thought this morning

Rahul Gandhi says he neither believes in caste system, nor endorses it. Well if truly means it, it is quixotic.

In the current political context, especially in view of the forthcoming UP election where caste consideration are prominent in selecting candidates and whole electioneering process, if he wants Congress to make a fresh beginning by rising above caste based politics, it is truly chivalrous.

However, for a person aspiring to be PM of 125cr Indians, denying a deep rooted social system, just because past 100-150years have seen it being misused and manipulated for petty political consideration, could be an act misplaced enthusiasm.

NDA may not be learning from UPA's mistakes

The latest NSSO report on the Economic Census in the country raises a number of questions on the government programs, policies and priorities. For example, consider the following:

(a) About 96% establishment have less than 5 workers. Another 3% have 6-9 people employed. Only three states - Tamil Nadu (13.81%), West Bengal (11.07%) and Maharashtra (10.02%) have more than 10% establishment with 10 or more workers.

Most of the legislations relating to employment and social security provisions (ESI, EPF, Gratuity, Bonus etc.) apply only to the establishments with 10 or more hired workers. Implying that only ~1% of the total private work force is eligible for statutory social security benefits.

(b) Live stock accounts for 87% of the agri sector related establishments. The whole of it cannot be dairy farming.

The whole beef related controversy must be reassessed in this light. It may just not be a religious issue. It might have serious socio-economic and even political implications.

(c) Out of 1.87mn handicraft/handloom establishments, employing 4.2mn people, 79% were family affairs without any hired worker.

From my experience I know for sure that a large number of these establishments employ household children as workers.

In my knowledge none of the legislative provision or policies designed to prevent child labour and promote child safety and security deals adequately with a parent employing his child for his business, as the child is not a hired worker in this case.

(d) About 36% of business establishment were operated from the home of the Self Owner, while another ~18% are operated from outside the home without any fixed structure.

From my experience I know that most of these business establishments may not exactly be "authorized" from civic and town planning view point. This creates number of problems from everyone. Grocery and other daily need shops operating from homes; tailoring shops; automobile repair shops create nuisance for the neighborhood; pose environment and safety hazard; put pressure on civic amenities like power, water and sanitation; motivate corruption; and above all lead to serious problem of child labor, underemployment and disguised unemployment. Town planners, civic administrations, and government must recognizes & accept this phenomenon to find acceptable solutions.

(e) Retail trade (~35%) and Manufacturing (~23%) are dominant non-agricultural activities in the country.

Congress party positioned itself aggressively for FDI in multi brand retail without taking this segment in confidence and explaining them that it would lead to better employment opportunity for them; and lost elections. NDA is repeating that mistake....to continue

Tuesday, September 20, 2016

Make growth employment elastic

Thought for the day

"Mediocre minds usually dismiss anything which reaches beyond their own understanding."

—Francois de La Rochefoucauld (French, 1613-1680)

Word for the day

Longanimity (n)

Patient endurance of hardship, injuries, or offense; forbearance.

Malice towards none

After Congress now SP hires an election strategist with experience of US elections!

What does this reflect?

First random thought this morning

Would it not be appropriate if someone from this side of the border also takes responsibility for loss of precious life in Uri (Jammu)?

After all some General, Minister, Politician, Bureaucrat must be accountable for the grave security lapse, especially after Pathankot had happened.

Is it too much to ask from those who routinely speak of morality, ethics, accountability and transparency in public life, beside claiming to be brave and potent enough to tackle the enemy?

Make growth employment elastic

Continuing from the last Friday (see here), in my view it is critical to take note the June 2014 working paper on Employment Elasticity in India.

In the said working paper RBI highlighted many interesting facts about the status of employment and its elasticity to the GDP growth.

In particular the change in occupation structure of the economy in past 15years is worth noting; because it helps setting up the agenda for future growth. It is important to note that one of the key promise of incumbent government is to make growth job oriented (hence inclusive) as opposed to jobless growth (therefore exclusive) growth achieved during past few years.

The working paper found that aggregate employment elasticity (change in employment due to economic growth) of Indian growth has fallen considerably in post 1991 period. In this period for every 10 per cent change in real GDP, there had been about 1.8-2 per cent change in employment. The current statistic is even poor.

Moreover, elasticity varies considerably across sectors. While agriculture has witnessed negative elasticity, services including construction have generally been employment intensive. Manufacturing employment elasticity has hovered in the range 0.29-0.33.

Within manufacturing, the employment elasticity for organized manufacturing sector based on various estimates seems to be higher, in the range 0.42-0.57 for 2000s and it has risen over the previous two decades. Given the huge productivity and wage differentials between organized and unorganized sectors, greater employment generation in organized manufacturing is crucial as it has larger multiplier effects.

Subsequent to 2011, India has seen significant moderation in its GDP growth rates. While employment numbers are not yet available for the recent years, Labour Bureau quarterly surveys as well as various private agencies’ information point towards moderation in employment generation. If these data sources are any hint, then one might see some changes in employment elasticity depending upon the relative pace of moderation in employment generation vis-à-vis growth.

The working paper suggests that going forward, it is the relative cost of capital vis-à-vis labour and the nature of investment demand that will determine to what extent growth would be job-creating.

Increased capital to labour ratio in the organised sector for a labour abundant country like India is a concern that has been well-highlighted. I have also been highlighting this rather frequently and to the annoyance of some of my government readers.

If India has to meet the demographic dividend challenge, focus should be on industries where employment elasticity is higher. On a rough basis, about 10 million people would need a job every year for the next 15 years. Finding productive jobs for such huge numbers is a big challenge, and clearly the answer lies in stepping up growth, and importantly, stepping up the employment intensity of growth....to continue tomorrow

Monday, September 19, 2016

Nifty: Down but not out

Thought for the day

We give advice, but we cannot give the wisdom to profit by it.

—Francois de La Rochefoucauld (French, 1613-1680)

Word for the day

Overweening (adj)

Exaggerated, Excessive

Malice towards none

The latest Arunachal development reflect best on who:

(a) Supreme Court

(b) Congress

(c) BJP

(d) None of the above

(e) All of the above

First random thought this morning

UP Chief Minister has reportedly offered his sulking Uncle whatever ministries, departments and power he likes. This demonstrate that the most populace state in the country has been reduced to a feudal fiefdom of a family, in a total mockery of democratic process and subversion of constitutional proprietary. Surprising the civil society, especially those who shout their throats hoarse on prime time TV shows every evening, are totally apathetic!

Nifty: Down but not out

Despite a sharp gap down opening on Monday, most benchmark indices held well and recovered almost half their losses. Nifty closed the last week with a wow loss of close to 1%. The initial surge in VIX also moderated materially in later part of the week.

The level of institutional activity was poor and volumes were below average. Market breadth does not indicate any panic or moderation in greed of the investors.

Technically, on weekly charts, NIFTY ended the week on the lower edge of the rising and contracting channel that started from end of February 2016. The channel continues to narrow further. However, any breakout (or break down) still appears some time away.

On weekly closing basis, now 8710 appears to be a strong support, however on daily basis 8606-8630 is a strong support zone. A close above 8867 this week shall neutralize the effect of last week's correction and the uptrend shall resume.

Bank Nifty appears to be losing momentum. Watch closely for a weekly close outside 19560-20340 range to decide the next course of action. Near term banks are avoidable for trading.

Friday, September 16, 2016

Case of misplaced priorities

Thought for the day

" It is utterly false and cruelly arbitrary to put all the play and learning into childhood, all the work into middle age, and all the regrets into old age."

—Margaret Mead (American, 1901-1978)

Word for the day

Pulverulent (adj)

Covered with dust or powder.

Malice towards none

Every politicians is busy telling us our problems!

No one is suggesting solutions(:

First random thought this morning

Visited a government hospital in Delhi yesterday. The condition of poor patient there was really appalling. The medical staff was highly stressed and exasperated. Non-medical staff was mostly unhelpful and exploitive.

This reminded me what I wrote last year at this time. Most of Delhi government & civic administrators, and many of Central leaders residing in Delhi (including PM himself) claim to come from modest socio-economic background. If true they must understand and feel the plight of these poor patients and work proactively to help them. But this does not seem to be the case.

Case of misplaced priorities

The recently released report on Sixth Economic Census (2013) in India is quite revealing in more than one sense. For, it shatters many myths and official claims and depicts the true state of affairs. The report also highlights some of the famous schemes of the incumbent government might be misdirected.

As per the report, there are 58.5mn business establishments (excluding public administration, crop production & plantation, defense and compulsory social service activities) operating in the country. Of these ~96% establishment were privately owned while just ~4% were government owned. These establishments employ 131.29mn people (52% in rural areas and 48% in urban areas).

· About 60% these establishments are in rural areas while about 40% operate in urban area.

· About 78% establishment are engaged in non-agriculture activities, while ~22% are engaged in agricultural activities (excluding crop production and plantation).

· During the 8yr period between 2005-2013, the business establishments have grown by ~42% from ~41mn to ~58mn. In this period agriculture establishment grew ~116% while non-agriculture establishment grew ~29%.

· Out of total ~58mn establishments about ~72% were Own Account establishment (meaning with no hired worker). These Self Owned Establishments (SOEs) grew 56% during 2005-2013. About 63mn people (48% of total employed people) are employed in these SOEs.

· About 96% establishment have less than 5 workers. Another 3% have 6-9 people employed.

· The government or public sector employs only 7% people. 79% people work in proprietary establishments. Organized private and cooperative sector employs 14% people.

· About 36% of business establishment were operated from the home of the Self Owner, while another ~18% are operated from outside the home without any fixed structure.

· Livestock accounted for ~87% of the agriculture activity.

· Retail trade (~35%) and Manufacturing (~23%) were dominant non-agricultural activities.

· About 74% business establishments are owned by Hindus and ~14% by Muslims.

· Out of 1.87mn handicraft/handloom establishments, employing 4.2mn people, 79% were family affairs without any hired worker.

...to continue next week.

Thursday, September 15, 2016

Bank on Banking - 4

Thought for the day

"Always remember that you are absolutely unique. Just like everyone else."

—Margaret Mead (American, 1901-1978)

Word for the day

Phalanx (n)

A number of individuals, especially persons united for a common purpose.

Malice towards none

The game of mudslinging between AAP and BJP is no longer funny!

First random thought this morning

It is the nth time we are witnessing violence and disruption to the public life due to the dispute over the Cauveri water. The dispute over Satluj Yamuna Link (SYL) is also far from resolved, as Haryana and Punjab governments are sleeping over it. Nonetheless, given the current Punjabi non-Punjabi equation in Haryana, politicians like Arvind Kejriwal may ignite it anytime.

Similarly there are many unresolved issues between various states and the center and states. It is just like the situation in various courts in India where millions of cases are pending for decades.

The point to ponder over is - As a society, are we too afraid to seek closure of issues for fear of an adverse outcome?

Bank on Banking - 4

At present, (a) high incidence of non-performing assets (NPAs), (b) inadequate capital for growth and (c) poor credit demand are three primary concerns for the public sector banks. Besides, the rising competitive intensity from private sector peers is also clouding the outlook for growth of PSBs.

I am not sure whether the current prices of all PSBs are adequately factoring in these concerns. But I am getting increasingly confident that these concerns shall fade in next couple of years.

The reason for my confidence are simple, intuitive and arguable. If someone wants to contest, I have absolutely no problem in listening to their viewpoint; though I am in no mood to concede my ground on this.

The accumulation of NPAs in PSBs over past one decade is consequence of three factors - (i) Large scale corruption; (ii) Error of judgment on the part of bankers and/or entrepreneurs; and (iii) prolonged decline in economic cycle.

In my view, the corruption through connivance of unscrupulous businessmen, bankers and politicians has diminished considerably in past couple of year. The things should improve further in next couple of years.

Error of judgment relating to incremental demand for services and infrastructure led to huge accumulation of unserviceable debt in sectors like power, roads, steel etc. The case is reversing now. Market driven pricing of natural resources - minerals, airwaves etc., in future shall remove another area of speculation in future earnings prospects that has misguided the judgment of lenders and businessmen in past.

The economic cycle recovery globally has remained feeble since bottoming in 2010-2011. India is no exception. There is little sign that broader economic recovery will accelerate anytime soon. However, a sustained 7% growth over next couple of years shall generate enough business for banks as (a) consumer and farm sector demand strengthens; (b) balance sheets of many corporates is repaired making them eligible for new projects and credit; (c) lending rates moderate; and (d) financial inclusion efforts of the government start yielding tangible results.

Insofar as the rising competitive intensity is concerned, it shall certainly be a matter of concern for the investors in PSBs. Given their bloated and inefficient cost structures and operational inflexibilities vs. their private sector peers, it is likely that they may lose market share over next few years.

In my view, given their reach, fast expanding market and recent efforts to improve operational matrix, the top five PSBs may not be impacted materially by the competition in medium term. Acceleration in the efforts to consolidate PSBs will also add to their strength.

Insofar as valuation is concerned, I feel that the wide gap between the private banks and large PSBs may not be sustainable. Though I am not sure how it will be bridged, e.g., (a) steeper rise in valuation of PSBs; or (b) steeper fall in valuations of private banks and NBFCs. As a strategy therefore, I am inclined to buy top PSBs on all declines.

Also read:

Bank of Banking - 1

Bank on banking - 2

Bank on Banking - 3