Friday, June 8, 2018

Greed still dominating the market sentiments




"If the Confederacy fails, there should be written on its tombstone: Died of a Theory."
—Jefferson Davis (American, 2909-1889)
Word for the day
Disneyfy (v)
To create or alter in a simplified, sentimentalized, or contrived form or manner.
Malice towards none
Nothing comes out of nothing, and nothing ever could.
 
First random thought this morning
A visit to a summer cricket coaching camp in south west Delhi was encouraging and shocking.
Encouraging because 60odd children aged between 12-17, all attired in proper white cricketing gears were slogging in 42°C temperature. Some parents were also waiting on the sidelines. Most of these aspiring cricketers were from lower middle families. Their parents could hardly afford the cost of proper gears and coaching fee.
Speaking to some of these children, it was discovered that playing IPL and make tons of money, is latest dream career for many children these days. The shocking part was that none of these appeared to have a Plan B in place.
 

Greed still dominating the market sentiments

Historically, one of the most successful, though intuitive indicator of the greed dominating the fear in market is outperformance of small cap stocks over large cap stocks. The outperformance peak often marks the peak of a market cycle. Subsequent correction in the outperformance of broader markets coincides with the bottoming process.
A strong cycle bottom is formed when the fear begins to dominate and benchmark indices begin to outperform the broader markets materially.
In past, an outperformance level of 25-35%, in a given period has marked the cycle peak for the market. The correction thereafter have been sharp, painful and very broad based. In one year post peaking, the broader market corrected much more sharply as compared the benchmark indices.
In last instance (2006-2009), the outperformance peaked in January 2008 and broader markets corrected sharply thereafter.
During July 2006 and January 2008, BSE Sensex gained 106%, while BSE Small Cap (187%) and BSE Midcap (150%) sharply outperformed the Sensex. IN Next one year till the market cycle bottomed in March 2009, Sensex had lost 18% (from July 2006 level), while Small Cap (41%) and Midcap (36%) lost much more than the Sensex.
On that parameter, the current market cycle might have peaked in January 2018. In the Cycle that began from august 2013, Sensex gained 98%, while Small cap 267% and Midcap 233% sharply outperformed. That outperformance has corrected somewhat in past 5 months. However, it may still be far away from the likely market bottom, that could be reached by March 2019.

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There is an argument that the market cycle that began in August 2013 had already ended in February 2016. And the current market cycle is a new one.
I personally do not agree with this viewpoint, as none of my parameters for market bottoming were satisfied in February 2016.
Nonetheless, even if we consider the cycle that started in August 2013, to have completed in February 2016, still the broader market outperformance is material. The market cycle therefore may not be anywhere close to the likely bottom.

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Thursday, June 7, 2018

Is it dotcom all over again?

"Never be haughty to the humble or humble to the haughty."
—Jefferson Davis (American, 2909-1889)
Word for the day
Superluminal (adj)
Appearing to travel faster than the speed of light.
Malice towards none
Does yog guru cum industrialist Baba Ramdev want to become UP Chief Minister?
 
First random thought this morning
In the present political scenario, Indian voters face really tough choice. Between the incumbent prime minister Modi, who is being seen as not being able to meet peoples' elevated aspirations (which he himself has raised in past 5yrs); Rahul Gandhi who is still untested in any administrative role; and a host of regional leaders who lack national appeal.
If the recent voting trends are any indication, we are heading for a 1996 like situation, where some BJP supporters may press NOTA; Congress may only be able to increase its vote share marginally from 2014 and regional parties which got decimated in 2014, emerge stronger.
If this assessment proves correct, expect 5 out of 7 Delhi seats for AAP!!!

Is it dotcom all over again?


The greed trade that dominated the Indian equity market for past couple of years has suddenly weakened in past few weeks. There are signs of fear emerging as the dominating factor in the market. Though they may not have capitulated as yet, but a sense of unease is palpable amongst investors.
This is a typical case of hangover after a spell of ecstasy and overindulgence, and a key sign of the beginning of the market cycle bottoming.
It is pertinent to note that the bottoming of stock markets is usually confused with the lowest point of indices in a cycle. In my view, it is a complicated and often long drawn out process through which the factors supporting a positive environment for “risk investments”, e.g., equities, fall in place, and a foundation for the next cycle is laid.
The following pieces, in particular, should fall in place before we could call the market bottom.
  • Psychological bottom should occur, i.e., greed should conquer the fear.
  • Macro environment should be supportive of corporate initiatives for growth.
  • Valuations should be fairly cheap to entice investors into taking higher risk.
  • Earnings upgrade momentum should be positive.
  • Technical bottom should be achieved.
  • The alternatives to equity (debt, bank deposits, gold, real estate) should sound less attractive on risk-reward basis.
  • Moderate to low volatility.
However, before I try to make any analysis of the bottoming process and form a strategy for the new cycle, it is important to assimilate the anatomy of the extant market cycle.
In past four years (FY14 to FY18), Nifty EPS has grown at measly ~2.8% CAGR, whereas Nifty has risen by ~12.2% CAGR. In this period, real GDP growth rate has fallen.
It is therefore important to examine if the extant market cycle that started in summer of 2013, is more like 1998-2000 dotcom cycle.
The dotcom cycle was purely a global phenomenon, in which Indian markets also participated, returning a phenomenal ~88% CAGR during November 1998 and February 2000. The retail participation in that cycle was overwhelming. But in hindsight we all know that it was mostly a "bogus" and "manipulated" market as rise in equity prices was not supported by earnings improvement or macro growth pick up. The gains were ephemeral and evaporated totally in less than a year.
In next few days I shall share my views on the same. Comments welcome.
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Wednesday, June 6, 2018

Labor pain

"To one who loves his country in all its parts, it is natural to rejoice in whatever contributes to the prosperity and honor and marks the stability and progress of any portion of its people."
—Jefferson Davis (American, 2909-1889)
Word for the day
Schlimazel (n)
An inept, bungling person who suffers from unremitting bad luck.
Malice towards none
Sharad Pawar must note that for a Janta Party encore, opposition parties would need some senior and still relevant BJP leaders to join them. Mere Sinha couple would not be adequate!
First random thought this morning
Water scarcity in Shimla must ring alarm bells in the corridors of power, both center and state. The day is not far when the locals will turn violent against the unmindful tourists and government agencies, thus destroying of whatever is left of this once heavenly place. Delhi is also witnessing riots like situation in many areas over water scarcity.
Experts and courts have been warning about deteriorating conditions of ground water across the country.
Any government or politician who makes a claim of development must account for water first.

Labor pain

Speaking with some traders in the Delhi wholesale markets, I realized that pain for migrant laborers is going to rise further in next few years.
Many of these markets are located in old Delhi congested areas. The only way to evacuate goods from these markets is through hand pulled rickshaws &, carts, and coolies carrying goods on their heads. I know for sure that this true for most old cities like Mumbai and Kolkata.
Most of these markets are likely to be either relocated or decongested in next few years, rendering this manual labor totally unemployed, just like the poor manual rickshaw pullers who lost their wages to E-rickshaws.
Construction work in large infrastructure projects is also becoming much less labor intensive now, with rising use of modern technology and automation.
If the civic authorities are to be believed, these migrant laborers are avoidable burden on the civic infrastructure. It is also a common complaint of law enforcement agencies that migrant laborers are also a major source of criminal activities in cities.
Having worked on some social projects to help these migrant laborers, I know the plight of these laborers rather well.
Many of these laborers mostly live in inhumane conditions, with little access to civic amenities like water, electricity, education, toilets, adequate health services, child care, etc. Many of them do not have a proper shelter to sleep in hot summer and chilly winters. Most of them have dependent family back home, but still work at much below the prescribed minimum wage rate, thus subsidizing the traders, MSME manufacturing units, builders etc.; and even households who use their services as rickshaw puller, vegetable & fruit vendors, domestic helps etc.
Worst, these laborers have to often face racist attacks from locals who believe that these migrants are encroaching upon locals' share of employment by undercutting the wage rate.
Despite a host of programs for rural employment, most of these laborers from UP, Bihar, Jharkhand, and Odisha have little to fall back, and cannot afford to return to their villages. Moreover, with rising automation, the opportunity to work in farms is also shrinking with time.
The question however is, in a large and diverse country like India, with frustrating and unpardonable regional inequalities, demographic imbalances and pervasive socio-economic disparities, should we not have a national labor migration policy.
Instead of providing random solutions like accident insurance, few night shelters, additional railway reservation counters during festivals and pulse polio camps, the government should consider regulating the interstate labor migration with a comprehensive legislation to safeguard everyone's interests.
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Tuesday, June 5, 2018

Four years of Modi rule - concluding part

"God forbid that the day should ever come when to be true to my constituents is to be hostile to the Union."
—Jefferson Davis (American, 2909-1889)
Word for the day
Atavism (n)
Reversion to an earlier type; throwback.
Malice towards none
While most business CEOs are persistently warning about the unemployability of Indian graduates, our HRD Minister is steadfastly busy handling homework of toddlers.
First random thought this morning
Last Friday, a journey across Yamuna Bridge in East Delhi was a traumatic experience. The stink emanating from the river down below was totally unbearable. This stink is a brutal reminder of the socio-political degeneration of our society.
Incidentally, the bridge referred to here is part of the Delhi leg of the much acclaimed Delhi Merrut expressway, that was inaugurated with much fanfare last week. There is a world famous temple (Akshardham) right on the bank of the river.
Wish our PM travels in an open carriage on this bridge and think about the plight of the Mother Yamuna.

Four years of Modi rule - concluding part

In this concluding part, I would highlight some failures of omission, which in my personal view may cost dear to socio-economic conditions of our country; and electoral prospects of BJP as well.
After many reviews and much deliberations, I have come to a conclusion that a meaningful assessment of any democratically elected government with a mandate to govern for a fixed term (5yr in our case), could only be made in terms of the opportunity available at the time of its assuming power.
Any assessment based on the comparison with previous regimes, or even with the political agenda (which is mostly rhetorical) presented during elections, would be mostly meaningless in a dynamically evolving environment.
In this light, in my view, some major opportunities available to the incumbent the government since 2014 could be listed as follows:
(a)   The youth of the country had voted for BJP and its allies, rising above the lines of caste and religion, for an agenda of inclusive economic development. The youth, across rural and urban landscapes was totally animated and enthusiastically willing to participate in the task of nation building. There was a massive anti-corruption sentiment.
In post independence era, the only parallel of this phenomenon could be drawn with the JP movement of 1970s. The major difference however was that at that time the economy of the country was in dismal conditions and socialism was the driving political ideology.
This time, however, the economy was in good shape, and consumerism was the driving ideology. As PM Modi himself very succinctly outlined the strengths of Indian economy in his earlier speeches - Demography, Demand and Democracy.
The government thus had the opportunity to mobilize the youth in nation building; rise above parochialism and stimulate some structural social reforms and corrections and thus lay foundation for a social renaissance.
(b)   The Chidambaram and Rajan duo had taken many painful decisions since 2013 and brought the economy back from the brinks of disaster. Most macro parameters (Current Account and Fiscal Deficit, Inflation, Forex reserves; external vulnerabilities, etc.) had begun to improve. Fall in global oil prices was becoming a massive support. Poor monsoon during 2014-15 did threaten some bit, but actual damage was marginal. The global economy was also recovering, thus improving external demand environment. The government thus had the opportunity to push exports harder and also implement some tough structural reforms.
(c)    Supreme Court and NGT had been actively pronouncing many policy directives, eg., for allotment of natural resources and sustainability, that minimized the chances of political and workers' union dissent and opposition to key economic reforms.
This provided the government with an opportunity to implement key socio-economic reforms in relation to the ownership of natural resources, decentralization of economic power and making growth sustainable, without much political opposition.
(d)   We way of a decisive mandate to PM Modi, in a semi presidential type general election in 2014. the people of India has afforded him an opportunity to take radical decisions to deliver on the constitutional promise of a dignified life (including death) for every citizen of the country. In November 2016 when PM suddenly took the decision to demonetize the high value currency notes, a large majority of people reaffirmed their commitment to the 2014 mandate.
(e)    A decade of high growth, had made Indian consumers darling of the world. Most global economies were looking at India for expanding their markets. For this many of them appeared willing to grant a variety of economic and political concessions. The full pockets of Indian middle class consumers afforded a great opportunity to the incumbent government to strengthen India' geo-political, commercial and political standing in the world.
There were many more opportunities. But if I evaluate how the incumbent government has exploited these opportunity, I do not get much promising result.
1.    The government has mostly failed the youth of the country.
Most business leaders, both from manufacturing and service industries, have frequently expressed grave concerns about the employability of the engineering and management graduates.
A host of government and private studies have shown that the level of average students at middle school level in most populous states like UP and Bihar is unacceptable. In many cases class 6 students failed to answer 2nd standard questions.
The government has failed miserably in formulating a nation youth policy or even an integrated education policy.
The achievement list of the government just includes, opening few new institutes of higher learning, and announcing some financial assistance schemes for select students and sportspersons. Something that has been happening ever since 1947.
Not being channelized properly, the vast reservoir of youth energy on which India is sitting presently, is already beginning to explode.
It is therefore extremely critical to evolve an integrated youth policy that include mission scale programs to educate and skill the youth, inculcate enterprise skills in them from early stages, enable them to engage in productive self employment, deal empathetically with their concerns, anguish, frustration and disillusionment.
It is a common belief that the famous Skill India program of PM Modi, is mostly a failure. My personal experience suggests that the common belief is certainly not way of the mark.
This failure in developing a strong education, skilling and training system aimed at equalizing the society is a one of the weakest link in Indian economy.
The poor standard of education and educators in a large majority of public educational institutes is not only perpetuating the socio-economic inequalities in the country, it is also proving to be a serious challenge to (a) economic growth in terms of shortage of skilled workforce; (b) fiscal consolidation by increasing the dependency ratio of people on the government; and (c) internal security by forcing youth to undertake unlawful and disruptive activities.
A large majority of Indian workers, artisans and laborers acquire their occupation skills and training on the job. Their exploitation aside, the skills they acquire are mostly of poor quality. By the time they realize or try to become independent of their masters, they are already casted in a rigid mold. They are usually their past prime learning age and have no option to chose a different occupation.
The fabled India story is quintessentially built on the premise of a strong middle class who will earn, consume, save, invest. With this state of populace, the dream of upgrading 700mn Indians from poverty to middle class will remain only that a dream.
The government has prima facie failed in assimilating that a uniform, good quality integrated education system is much higher priority than building airports, colleges and smart cities. Appointing almost uneducated graduates as teachers to win their votes is totally inadequate.
The youth today is disillusioned, disenchanted and demotivated.
2.    There has been little in the name of structural economic reforms in past four years. Commitment to the subsidy rationalization and fiscal discipline raises some optimism, but most of it is subdued by populist and mostly dissipating measures like farmer loan waiver, demonetization, etc. As I mentioned in an earlier post, the Ujjawala scheme alone has the potential to undermine the entire subsidy rationalization effort of the government. (see here).
Besides, the wavering in adhering to market pricing of fuel shown during recent Karnataka elections was not quite inspiring.
3.    Instead of taking cue from the Supreme Court and NGT, and pushing forward the agenda of transparency and sustainability, the government has often been seen confronting the Judiciary and undermining its concerns.
4.    It is a common belief that the incumbent government has been totally market driven in its governance and policy approach, rather than people driven. It has mostly failed in ensuring a dignified life (and death) for the citizens of India, as envisioned in the Constitution. Bogged down by frivolous issues like eating habits of people, and under influence of distorted interpretation our great legacy, a totally avoidable environment of mistrust, anxiety and uncertainty has been created.
Court directed efforts for ensuring dignity and rights of Muslim married women have been mostly reduced to political gimmickry.
Young students of class 10 have been stressed to commit suicide, a phenomenon earlier seen in students aspiring for professional degrees.
5.    The interest of foreign government and businesses in Indian market and entrepreneurial capabilities has been trivialized into personal charisma of PM Modi.
Though I do not have any data to support my contention, by intuitively I feel, that this undue political interference might have actually resulted in diminishing the foreign interest in Indian business (and markets) and also impacted the exporters of goods and service adversely.
The unprecedented rise in Indian rich migrating abroad may not entirely be due to tighter black money surveillance. Some of it may also be due to businessmen and entrepreneurs not being very optimistic about Indian markets in near to midterm.
To conclude, I would rate the performance of the incumbent government as follows:
(1)        Exploiting the opportunities available - UGLY
(2)        Continuity of policy and programs - GOOD
(3)        Innovation and originality - BAD
(4)        In comparison to UPA government - GOOD
(5)        Delivery on promises - UGLY
(6)        Execution of key projects, policy initiatives and programs - GOOD
(7)        Maintaining social harmony, promoting peace and cooperation - BAD
(8)        Social reforms - BAD
(9)        Economic reforms - BAD
(10)      Foreign policy - GOOD
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Friday, June 1, 2018

Four years of Modi rule - 9

"Should you protect profits? Yes. But run for the hills? No."
— Phillip Roth (American, 1933 - )
Word for the day
Lateritious (adj)
Of the color of brick; brick-red.
Malice towards none
If the opposition does manage to unite for 2019 general election and we have a Mahabharta type two groups fight - who will be the Krishna in that case?
PS: No comments on which group would be Pandava and which is Kaurava
 
First random thought this morning
BJP members and leaders seem exasperated at the shenanigans of opposition leaders, media and critics over fuel price rise (and the Cut!).
They want everyone to believe and accept the fact that now the fuel pricing is completely market driven and "normalization" of taxes on transportation fuel and "rationalization" of subsidies is way behind.
But the fact remains that they suspended price hikes during Karnataka elections and thereby totally obliterated the credibility of the whole argument, themselves. Playing victim in this case would not help!

Four years of Modi rule - 9

Before I share my views on the mistakes of commission and failures of omission of the incumbent government, let me ask you "what would be your reaction to the following situations?"
(1)   Your housemaid comes to you and tells, "I have cleaned more than half the utensils. As you yourself told me that before hiring me, you were cleaning the utensils yourself and would do the job only every alternative day. In that light my performance is excellent. So, appreciate my effort and order a pizza for me".
(2)   You are a branch manager of a bank. your clerk comes to you and tells, "I have cleared more than 65% of the checks presented today. In my view, it is an outstanding performance. Please allow me to leave early today."
(3)   A young girl in your neighborhood gets molested and killed by goons. The area police inspector comes to the condolence meet and claims, "this year the number of heinous crimes in your area is lower by 30% as compared to the average of previous five years".
While you contemplate your responses, I may tell you mine - I will be incensed. My education & training that makes me acquiescent, may not permit me to react violently, but if someone does I might not hold him back.
The incumbent government got the massive mandate for implementation of an agenda of transformation, development, inclusion, cooperation, non-discrimination and zero tolerance on corruption. The prime minister personally promised an environment of mutual trust and harmony.
In my view, the performance on most of these parameters has been below average. I would argue here not in comparison with the performance of previous governments, but in light of the opportunity available and the promise made.
I find the entire government (also BJP members and leaders) suffering from what I call Deewar Syndrome. In this Bollywood blockbuster of 1970s, the protagonist has a challenging childhood and youth. Tired of fighting hunger and injustice, he joins a gang of smugglers and becomes rich.
His mother and younger brother though refuse to compromise their ideals. The younger brother eventually becomes a police officer.
A day comes when the police officer brother gets to know the business of his elder brother and asks him to confess and surrender to law. The elder brother agrees to sign the confession statement but not before the younger brother gets the confession from all those who coerced him to take the path of crime. He famously says - "भाई पहले उसका sign ले कर आओ, फिर मैं sign करूंगा."
"Go ask them what they did and delivered in 70yrs, then we will account for our 4yrs" is the most common refrain of the ruling party and its leaders.
I have already made it clear that I find the shield of "what did they do in 70yrs", which BJP leaders and supporters frequently use to defend their below par performance, totally hollow and weak (see here)
Trust deficit widened
Economic growth which is not sustainable and equitable has little meaning, in my view. Such growth, whatever statistic shows, brings only misery and dissipation.
A harmonious and peaceful society enjoying a decent lifestyle should be the ultimate goal of economic growth and development. Otherwise, it has little meaning, regardless of the statistical achievements.
Swami Jagadatmananda in his famous work “Learn to Live” extolled the readers - the sincerity and honesty of the means to achieve a goal is equally important as the goal itself.
The government has mostly failed in promoting an environment of mutual trust and harmony. It is rather unfortunate to see that the prime minister himself leaves no opportunity to position himself as a lone crusader fighting an army of corrupt, unethical and unpatriotic citizens. Every sentence the BJP leaders and ministers utter mostly translates to "we" vs. "they".
The trust deficit in the country has widened substantially in past couple of years.
Poor planning and inadequate consultative process in implementation of major initiatives like GST and Demonetization have widened the rift between businesses and administration.
Unabated aggression shown by the "fringe" right wing elements, has certainly made people from all religious communities extra cautious and to some extent fearful.
The acceptance of contrarian and dissenting views has also not been worthy of a government and leadership whose main plank was "sabka saath, sabka vikas". I may be failing in appreciating the sublime message PM is conveying, but the narrative at the surface is "if you are not with me, your nationalism credential are inadequate."
The urban youth and middle classes enthusiastically participated in 2014 general elections. They however look mostly disenchanted and apathetic to politics, four years later.
Reforms mostly administrative corrections
Reform is the most abused buzzword in Indian context at least. The governments, policy influencers and opinion makers, politicians, popular commentators, and media experts have misused this terminology to classify all administrative changes and corrections, including insignificant steps as eliminating or adding few columns in the return to be filed annually by the tax payers.
Assigning the task of cleaning railway stations to private contractors, in order to save some cost and fix accountability to ensure cleanliness on such contractors is also listed as "reform" in some government papers.
Replacement of Rs1000 and Rs500 currency notes with Rs2000 currency notes is cited as the biggest reform by the government.
I have been insisting that the reforms must be distinguished from mere administrative corrections. A policy measure must change the status quo materially, in order to qualify as "Reform". Only transformative changes that change the status quo materially qualify as "reforms".
In economic context, reforms include fundamental changes in the processes and practices of doing business and consuming goods and services. But reforms are not only economic. Historically the social reforms have proved to be rather more transformative.
When faced with the task of catapulting the economic activity to a higher orbit it is imperative for the policy makers to distinguish between "administrative corrections", "systemic efficiencies" and "reforms".
For example, transfer of de jure power to fix prices for transportation fuel to IAS officers at the helm of public sector oil marketing companies from IAS officers assisting the Prime Minister and Cabinet Committee on Economic Affairs is merely a administrative change. A 25-30% rise in global crude prices from here will most likely cause this change to reverse, as was the case in 2003-04.
A reform in this area would be implementation of an integrated energy policy that motivates and (where necessary) forces changes in the consumption patterns.
Similarly, selling 10% shares in public sector undertaking and listing it on stock exchanges for trading, without actually changing the way it functions, is not reform. It is actually reverse of reforms if we consider the case of banks and energy companies where interests and concerns of the minority shareholders are totally disregarded in functioning of these companies.
Tolerance on corruption
This is a sensitive subject and I can't afford the risk of a multi million defamation suit! Nonetheless, I would still mention that all those who regularly deals with tax authorities, judiciary, civic authorities, law enforcement agencies, etc., candidly maintain that there is little change in the level of corruption in past four years.
We all have seen the conduct of professionals and bankers during demonetization. There is enough evidence of misuse of GST by ingenious businessmen and professionals.
...to conclude on Tuesday
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