Vijay Kumar Gaba

Wednesday, March 8, 2017

An Elephant and six blind men

Thought for the day

"To God everything is beautiful, good, and just; humans, however, think some things are unjust and others just."

—– Heraclitus (Greek, 544-483BC)

Word for the day

Fusillade (n)

A general discharge or outpouring of anything, e.g., a fusillade of questions.

Malice towards none

Karan Johar, one could appreciate.

But why Abu Azmi is a news?

First random thought this morning

What would be a good development strategy for Indians:

(a) Be proud about their ancient past, and attempt to recreate it.

(b) Be proud about their ancient past, and continue to live a life a complacent life.

(d) Forget about past, begin the development process from where we stand today.

(e) Let it be, we are doing just fine.

An Elephant and six blind men

Once upon a time, there lived six blind men in a village. One day the villagers told them, "Hey, there is an elephant in the village today."

They had no idea what an elephant is. They decided, "Even though we would not be able to see it, let us go and feel it anyway." All of them went where the elephant was. Every one of them touched the elephant.

"Hey, the elephant is a pillar," said the first man who touched his leg.

"Oh, no! it is like a rope," said the second man who touched the tail.

"Oh, no! it is like a thick branch of a tree," said the third man who touched the trunk of the elephant.

"It is like a big hand fan" said the fourth man who touched the ear of the elephant.

"It is like a huge wall," said the fifth man who touched the belly of the elephant.

"It is like a solid pipe," Said the sixth man who touched the tusk of the elephant.

They began to argue about the elephant and every one of them insisted that he was right. A wise man was passing by and he saw this. He stopped and asked them, "What is the matter?" They said, "We cannot agree to what the elephant is like." Each one of them told what he thought the elephant was like. The wise man calmly explained to them, "All of you are right. The reason every one of you is telling it differently because each one of you touched the different part of the elephant. So, actually the elephant has all those features what you all said."

"Oh!" everyone said. There was no more fight. They felt happy that they were all right.

The moral of the story is that there may be some truth to what someone says. Sometimes we can see that truth and sometimes not because they may have different perspective which we may not agree too. So, rather than arguing like the blind men, we should say, "Maybe you have your reasons." This way we don’t get in arguments. (Source:Jain World)

A similar situation has arisen in Indian equity markets in past few months. There is strong disagreement amongst analysts, commentators, investors and observers with respect to valuations and therefore sustainability of current price level.

The disagreement, in our view, is a consequence of limited view each of us seems to be taking.

In my view, under the present circumstances, it would be more appropriate to take a holistic macro view of the market. Views based purely on earnings multiple or assets using extrapolation of near term historical data may probably not lead to accurate conclusions.

A non-linear view considering wider historical perspective and socio-political context may be necessary to make a valid argument for staying invested in Indian equity markets.

Tuesday, March 7, 2017

"Kya Lagta hai?" (Whats the outlook?)

Thought for the day

"Hide our ignorance as we will, an evening of wine soon reveals it."

—– Heraclitus (Greek, 544-483BC)

Word for the day

Salaam (n)

A salutation meaning “peace,” used especially in Islamic countries.

Malice towards none

Democracy in India is a farce. Politicians swear by democratic traditions only until they are elected to a public office. As soon as they assume the office, they become feudal lords, irrespective of their socio-economic backgrounds and political ideologies.

They need servants to carry their mobile phones, bags and briefcases; to open doors of cars for them; to open doors of elevators for them.

They seek privileges even in temples and hospitals.

First random thought this morning

Life of suitable boys in smaller cities and town is really tough. No girl from larger towns and cities wants to relocate there for marrying them; and most eligible girls from their towns want to relocate to larger towns after marriage.

A very rich boy from a town in UP aptly put it like this - "Money can certainly not get you everything. For few things you need to slug out in Mumbai/Delhi".

"Kya Lagta hai?" (Whats the outlook?)

Nowadays, I am getting numerous calls every day, asking invariably the same couple of questions, i.e., "Kya Lagta hai?" (Whats the outlook?); and "Kya karna chayiye?" (what should be the strategy?)

The first questions seeks opinion on both -the political situation as well as financial markets. The second question is limited to the financial markets.

Insofar as the political situation is concerned, my view has been consistent that BJP is well on its way to become the Congress of 1950s and 1960s. In few years, it will have competition only from within.

In near term, the party is most likely to win the assembly elections in UP and Uttrakhand. In Punjab BJP and SAD alliance is losing, and In Goa and Manipur they are very much in the race.

Regarding investment, I may reiterate what I have been saying for past three decades.

Investors must be well versed with their socio-economic environment. They should be aware about the events and circumstances that may impact their investment portfolio. But it is not necessary to react to each and every event and data point that comes to their knowledge. In fact most events and data points may actually not need any action on their part.

Investors may better follow a rather simple investment style to achieve their investment goals. It is highly likely that most find this path boringly long and apparently less rewarding, but in my view this is the only way sustainable returns could be obtained over a longer period of time.

I believe, taking contrarian views, speculating policy changes and implications of election outcome, anticipating short term performance (e.g., monthly sales, quarterly profits etc.) and reacting to that, or arbitrage on information/rumor of a corporate action are examples of circuitous roads or short cuts that usually lead us nowhere.

Taking straight road means investing in businesses that are likely to do well (sustainable revenue growth and profitability), generating strong cash flows; have sustainable gearing; timely adapt to the emerging technology and market trends, and most important have consistently enhanced shareholder value.

These businesses need necessarily not be in the “hot sectors” like commodities in early 1990’s, ITeS in late 1999s, or infrastructure and financials in 2004-07. These businesses may necessarily not be large enough to find place in benchmark indices.

I have discussed it many times in past. However, given that the market may be entering a prolonged period of high volatility and low returns, making investors jittery and indecisive, in next few days I shall present my thoughts as to why contrarianism or lottery seeking attitude to investing might not be the right one and may expose investors to greater losses.

Of course there is nothing proprietary about these thoughts. Many people have often repeated it. Nonetheless, I feel, like religious rituals and chants, these also need to be practiced and chanted regularly.

Friday, March 3, 2017

Markets not in equilibrium

Thought for the day

"The downtrodden are the great creators of slang.'

‑Anthony Burgess (English, 1917-1993)

Word for the day

Malfeasance (n)

The performance by a public official of an act that is legally unjustified, harmful, or contrary to law; wrongdoing

Malice towards none

Many "intellectuals" who are frequently visible on TV and social media, do not appear to be much intelligent.

Wisdom is something, that has not even touched them.

First random thought this morning

The government has shown remarkable resolve in sustaining the dismantling of control of transportation fuel and cooking gas. The highest ever single rise in LPG prices, when the UP elections are in critical phase, clearly demonstrate this.

Why economists like former Prime Minister Manmohan Singh and Amartya Sen; and politicians like P Chidambaram fail to mention it when they criticize the government on economic failure. This prejudice and partisanship is making even their valid criticism incredulous.

Markets not in equilibrium

In my view, a combination of following six factors determines the movement of stock markets, under any given circumstance.

1. Macro outlook

2. Earnings outlook

3. The quality and quantum of flows (liquidity)

4. Valuations

5. Positioning vis-à-vis alternatives like debt, real estate, gold etc.

6. Market technical (demand and supply equilibrium)

In the state of equilibrium of these six factors, the markets are calm; and average returns are closure to nominal GDP growth, usually higher than the risk free rate.

In this state usually the premium for alpha generation (outperformance of individual stock return over average return) is not great, as stable macro conditions, adequate liquidity, steady flows, reasonable valuations, and balanced market technical allow most businesses to grow in tandem and there is little case for unusually premium valuations of some businesses over most others.

On the contrary, when these key factors are not in equilibrium, i.e., one or more factors are far away from the mean position, the divergence in stock performance is significant and thus the premium for alpha generation is much higher.

From this viewpoint, if I analyze the market performance of past couple of years, it is clear that the divergence in performance of stocks is unusually high. Especially, many small and midsized companies have outperformed their large size peers massively. The premium for alpha generation has been accordingly significant.

Historically, whenever, the key factors impacting the stock markets have remained in the state of inequilibrium for longer period, the corrections needed to revert to the state of equilibrium have been sharper, deeper and painful.

If the correction occurs from bottom to mean, the pain occurs from missing the move. If the correction occurs from the top to mean, the severe erosion in prices causes the pain.

This makes me conclude two things:

(a) The phenomenal rise in the assets under management of institutional investors like mutual funds, pension funds and portfolio managers may be related to the premium for alpha generation. This becomes even more clear, if we consider the stupendous rise in the asset under management of portfolio managers who invest in broader markets.

(b) The key factors that impact the market are not in equilibrium. This essentially implies that we shall soon see the correction - this time top to mean, via bottom.

Thursday, March 2, 2017

Is it TINA alone?

Thought for the day

"Women thrive on novelty and are easy meat for the commerce of fashion. Men prefer old pipes and torn jackets.'

‑ Anthony Burgess (English, 1917-1993)

Word for the day

Shrive (v)

To grant absolution to (a penitent).

To impose penance on (a sinner).

Malice towards none

The award for Best Global Jumlebaaz goes to— PM Narendra Modi!

ohhh... sorry...sorry

it goes to- President Donald Trump!

First random thought this morning

From 10k feet above, the entire unrest in DU appears to be part of a desperate strategy of CPI (M) to regain some relevance in Indian politics.

Unfortunately for them, they could only motivate some anti BJP voices. No support for communists agenda.

The meddling by Congress in the matter shall only further erode the already diminished support base of the party

AAP could be an unintended beneficiary here.

Is it TINA alone?

A deeper analysis of the current behavior of Indian stock market would need to examine at least two factors:

(a) How much is the role of TINA (There Is No Alternative) in the rise in inflows into the Indian equities?

In past three years we have seen marked acceleration in the domestic flows into the Indian equities. More importantly, the rise in flows has been accompanied by the acceleration in the institutionalization of the investment process.

A much higher proportion of flows is now coming through regulated institutional investors like mutual funds, portfolio managers, pension schemes, etc. Thus is quite unlike the past instances when the investors preferred to invest themselves.

Even more importantly, a significant part of the fresh flow appear to be committed for longer term. Steady rise in SIP (Systematic Investment Plan) and pension fund contributions indicates towards this trend.

Given the longer term nature of inflows, the investment managers are in a better position to take investment calls on relatively smaller and midsized companies where the business cycle are more volatile & comparatively untested, but growth potential is significantly higher as compared to the larger stable businesses. The market breadth therefore is deeper and broader this time.

It is worth examining whether this higher allocation to the equity and related instruments, marks a structural change in the behavior of Indian household investors, or it is just due to TINA factor, as real estate is in bad shape, informal credit market is in shambles, deposit rates have fallen, tax arbitrage for equity has widened, and gold has become very volatile and unpredictable.

Insofar as the global investors are concerned, a rally in developed markets did prompt a move towards these markets from emerging markets. However, given the remarkable stability of Indian rupee , resilient growth, improving macro, and relatively well regulated market, they have remained overweight on India.

It is worth examining, how would they react if RBI does let INR slip to 70-71/$ level, as has been suggested by many experts.

(b) Indian equities are not cheap by any standard. Relative to their developed market peers these may appear fairly valued, but not 'cheap'. The case for re-rating of Indian equities needs to be examined carefully.

Is the macro stability enough reason for re-rating; or we need to see improvement in earnings' outlook also?

In my view, if TINA is amongst the key factors driving equity prices, a great deal of caution is needed. I do not see any case for sustainable re-rating of Indian equities as yet.

Wednesday, March 1, 2017

This time it's different

Thought for the day

"He said it was artificial respiration, but now I find I am to have his child.'

‑ Anthony Burgess (English, 1917-1993)

Word for the day

Scapegrace (n)

A complete rogue or rascal; a habitually unscrupulous person; scamp.

Malice towards none

Next time the Supreme Court hears the BCCI case, it must keep in mind the case of CBCF (popularly known as the censor board).

The people from the trade are not always the best regulators.

First random thought this morning

At the end of the battle of Kurukshetra, the victorious Pandava brothers argued amongst themselves as to who should get the credit for their victory.

Krishna suggested that Barbarika's (Bhima grandson also worshiped as Khatu Shaym ji) head, which had watched the whole battle from a hilltop should be allowed to judge.

Barbarika's head suggested that it was Krishna alone who was responsible for the victory. Barbarika replies, “All I could see were two things. One, a divine chakra spinning all around the battle field, killing all those soldiers. The other was Goddess Mahakali, who spread out her tongue on the battle field and consumed all the sinners as her sacrifice".

And some, who claim to be saviors of Hindu Dharma, and great devotees of Krishna and Kali, still insist Pakistan killed Gurmehar's father.

This time it's different

My recent interactions with investors and businesspersons have convinced me that the current market up move is distinct in some sense.

Historically, most bull markets have been driven by high hopes and fueled by greed of investors. Asset prices correct sharply as hopes are belied and fear overtakes the greed.

But in the current instance, I do not see much hope in the air. The usual euphoria that is usually seen with broader market indices at all time high, is conspicuous by its absence.

Greed and fear more or less are in balance.

But still prices are moving higher!!!

The move to replace 86% of country's currency in a single swap; a strong drive by taxation authorities to enforce compliance has confounded the small and medium sized businesses. Their entire business model that was based on poor tax compliance, lack of transparency, and informal financing stands challenged. Imminent implementation of GST also adds to the uncertainty for them. Outlook for both private consumption and investment therefore remains clouded.

Severe correction and illiquidity in real estate market has eroded the wealth effect by a good measure.

Despite bumper crops across North Indian planes, the farmers do not appear enthusiastic, as crop prices have plummeted. The specter of El Nino, that impacted monsoon for two consecutive years, reappearing in late summer this year is also looming large on their psyche.

Financial sector is still struggling with humongous burden of non-performing assets. Though, the rate of accretion has slowed down notably in past couple of quarters, the recoveries of NPLs has not been encouraging by any measure.

To the contrary, new pockets of potential stress are emerging especially in power and telecom. The capacity utilizations remain low, and managements are not guiding any material pickup in next few quarters.

Bankers are also not sure about the repercussions of the shakeout in 'start-up" and "E-commerce" space. Lenders' direct exposure to these sectors may not be large, but personal credit to the employees who would lose their jobs could potentially bring some pain.

RBI has already indicated that the monetary easing cycle may be over for the time being. In fact, there are some voices already making a case for tightening of monetary policy, as higher global commodity prices, a stronger USD (as Fed hikes), and likely rebound in agri inflation, could raise inflationary expectations.

The macro advantage in terms of control over twin deficits and inflation could therefore also wane to some degree later this year.

The rally in stocks prices needs to be analyzed in light of these constraints.

....to continue

Tuesday, February 28, 2017

A visit down memory lane

Thought for the day

"Violence among young people is an aspect of their desire to create. They don't know how to use their energy creatively so they do the opposite and destroy.'

‑ Anthony Burgess (English, 1917-1993)

Word for the day

Meritorious (adj)

Deserving praise, reward, esteem, etc.; praiseworthy.

Malice towards none

An equity analyst's comment on La La Land's performance at Oscars - "Results below expectation, all positives priced. Downgrade to Hold."

First random thought this morning

The latest round of elections is drawing to close. In next two weeks we would know the broad winners and losers. The local body elections in this round have mostly gone in favor of BJP. A win for BJP in UP will decimate the Congress Party, and we may see a fresh round of desertions. Whereas a win for SP-Cong alliance will keep it alive, though still on life support system.

in the meanwhile the side shows (Punjab, Uttrakhand, Goa and Manipur) may throw burst some firecrackers, the smoke of which will last for few weeks.

In the meanwhile an AAP senior leader claimed that they are in driver's seat in Punjab and Congress is coming third!!!

A visit down memory lane

Global equity markets have been largely buoyant for past five months. They look distinctly tired now.

There are more words of caution than encouragement for traders and investors alike. To the trend followers this hint of fear is the only supporting factor for staying fully invested in the market. Otherwise, it is hard to find much rationale for sustainability of current market levels.

To the contrary, there are enough indications suggesting that the markets will have strong reasons to correct sharply in the coming months.

I say this for both domestic as well as global markets.

A quick recap of events since July 2007 will show that the global markets have corrected sharply at least on four occasions. The triggers were collapse of a large bank (Lehman Bros), fiscal crisis in some peripheral European economies (Portugal, Ireland, and Greece), debt ceiling crisis in US and CNY devaluation by China.

Though, the "whatever it takes" approach adopted by central banks in US, Europe, and Japan since 2010 provides comfort that the financial markets may not freeze this time, unlike 2008-09, it is evident that the central bankers might have already spent all arrows in their quivers. Moreover, none of them appears keen to continue with the non-conventional monetary policies in vogue since 2010.

So a less negative outcome of crisis is all that is assured. But there is little positive in the air.

We dreaded Grexit. But we already have Brexit.

With IMF and ECB crutches, Greece looks only a shade better than 2011. The situation can revert to pre bailout position in no time.

We were jittery when CNY was devalued last year. Since then CNY has been depreciating. Formal announcement of Trade War with US, may prompt PoBC to devalue it more, rather dramatically.

We are at the threshold of another debt ceiling debate. March 15 is the date when the previous relaxation expires.

We dreaded a Trump victory, fully aware that an American president is far less powerful than popularly believed. US as a society is least nationalist. But that is certainly not true for Germany and France. Imagine a German Trump and/or French Trump and/or Italian Trump, at a time when UK formally begins to withdraw from the common European market.

On domestic front, the incumbent government shall complete 3years in May. From October onwards, we enter a critical election phase (Gujarat, MP, Chhattisgarh) that will last till next general election.

All said and done, there is little sign of industrial recovery on the ground. The specter of El Nino revival is already looming large on the horizon. Services, especially construction, are showing no sign of pick up, despite elections and higher budgetary allocation.

So what may keep market higher.....to continue tomorrow

Thursday, February 23, 2017

In rush for gold, don't leave the family behind

Thought for the day

"Only on the edge of the grave can man conclude anything."

—Henry Adams (American, 1838-1918)

Word for the day

Excoriate (v)

To denounce or berate severely; flay verbally:

to strip off or remove the skin from, e.g., Her palms were excoriated by the hard labor of shoveling.

Malice towards none

Recent newspaper reports have frequently proclaimed that Yamuna is dead and Ganga is good only for walking on Ghats, and dangerous if you take a dip.

I did not see anyone's blood boiling over this.

Neither self claimed protectors of Hindu interests; nor the custodians of Ganga-Yamuni tehjeeb; nor any politician; and nor those NGOs who have gulped billions in the name of cleaning the two rivers.

First random thought this morning

Nowadays everything happening or not happening is seen as a referendum on PM Modi.

The AIDMK crisis in Tamil Nadu, Assembly elections in various states, Municipal elections in Maharashtra, tax collection under various disclosure schemes, economic growth, farmers' suicide, employment generation, etc. etc. - for everything PM Modi is directly accountable and responsible. So much so that the incumbent chief minister of UP is accusing PM of not creating enough jobs in his state.

At first it seems ridiculous. How a single person could be held accountable for all things happening (or not happening) in a country of India's size. But then you realize, it's actually his doing. He centralized everything to PMO and started proclaiming "I did that" and "I did this".

In rush for gold, don't leave the family behind

In past few days, I have written about my views about the problems with the current development paradigm of the country. Some readers have objected to my views, as being overly cynical. Some have gone to the extent of terming my views nearly Maoist. I do not want to waste my time and energy in offering them any clarification or justification.

I may however make it very clear that I firmly and unconditionally believe in free markets. I strongly oppose the crony socialism as well crony capitalism.

The point I have tried to raise in my recent posts is that the quasi colonial model of development, that our successive governments have adopted, is not desirable. Considering the diversity of our country, and character of our democracy, we need to follow a participative model of development, where the local communities are made equal partner in the process of development. The focus of development should be people and not markets.

I may cite two simple examples (there are 100 others) to elucidate my point.

(1) Most of the highways in the country appear to have been planned without consulting the people whose life shall be affected by these highways. They are just informed about the decision taken by government authorities. These people are also not engaged in the construction process.

I am not getting into the question of land acquisition here.

The highway planning is totally market oriented. It mostly ignores people. The authorities plan how much people will gain from highways in terms of better market access. But they seldom consider that highway will not only take the produce and people out of one place. It also will bring in people and goods from outside. And this inflow of people and goods could affect the life of people tremendously, through immense social, economic and cultural impact. In many cases to the extent of trauma.

(2) A few months ago, reports suggested (see here) that Niti Ayog has made a strategy to win 50 medals in 2024 Olympics.

A government obsessing so much about Olympic medal sounds inappropriate (for lack of a proper word) to me. In my view, the government should focus on the integrated growth policy for the country's children. This policy should, inter alia, deal with issues like basic education, health, character building, vocational skill & training and building advanced infrastructure for promoting excellence in various fields. It must be ensured that all children engage in some physical activities to stay healthy and develop good habits like team spirit, punctuality and discipline. If some child has the ability he/she will compete and win medals. But this cannot be a policy objective.

The government has three ministries - Sports and Youth Affairs (implying that sports is only for youth); Child and women welfare (implying child is responsibility of only mother and has nothing to do with sports); and HRD (implying sports has nothing to do with human resource development). This explains the point I am trying to make.