Investing In The Of Time Of Easing

Last few years have been a nightmare for all the financial models. And some one needs to do some serious re thinking in terms of all the equations and financial market theories that were considered as holy grail of finance.

One of the worst affected theory could be the long term stock market returns. Many a books preach the fact that over a long term, stock markets always ted to outperform the bonds and other low risk assets. While the theory was all good in 80s and 90s, with US witnessing a secular bull market, it had been left wanting over the past few years. Starting with Japan, then the dot com companies, and now china, most of the long term investors are deep in red. Time for Finance 2.0.

The post crisis world is characterized by easing policies adopted by central banks of all major economies. This is akin to a recession in real terms, even though we may see some growth in notional terms. So, while our salaries may keep rising, because of devaluation of currency, our real purchasing power will keep going down. One of the prime reasons why most financial assets have performed badly in recent times, whereas the real assets continue to do well.

In these markets, real assets may be the best investments. So find something which may be valued in years to come and put your money on it. Be it Gold or Land, or even website addresses, anything which is a real asset and would be used by future generations would be a good bet.

Let me track how Nifty performs vis a vis Gold over the next couple of years. I would tend to think it would underperform.

2011: As I See It

It was always a game of confidence - all the dovish and/or hawkish comments are nothing but a way of conveying optimism to the markets. When the inflation concerns rise, the tone is hawkish, and when things heat up, they get dovish. There is never anything more to it - like most people Central Banks are also shooting in the dark. Its like a physicist's prescription - most of the time its hit and trial method. 


All that QE was intended to do was to create abundant liquidity, and confidence. That no matter what happens, the Central Bank would do anything and everything it can do. And it seems to be working. Money is flowing back to USA, and S&P is almost at its highest level in post-crisis period. Same is true for quite a few other major markets. Its a game of chicken everyone is playing - the underlying economy is still fragile, and there are lot of skeletons hidden in Eurozone as well. However, if 'somehow' governments succeed in keeping the confidence up that we will tide over the crisis, we eventually will. There is a difference between 2008 and 2011 - it was banks then, and its sovereigns now. The difference is that unlike banks, sovereigns can change the rules of the game, if need be. And thats a very big difference. Its not one Mexico defaulting, or one Argentina defaulting. Its a global scare, and any actions on the part of big sovereigns would certainly have endorsements from others. The issue of 'Wikileaks' is a case in point - if they don't like your actions, they would frame you under 'anything'. And George Soros of the world may have broken the bank of england, but it takes much more to break the Bank of the World. There are still chances of we plunging back into recession, but its just a 10% probability (though if it happens, they all hell will break loose), and best bet would be a 60%-70% Put. 


The second part of the debate is EM vs DM - where do we see money flowing to. I think it would again be EM this year, in spite of all the talks about DM coming back in vogue. EM countries still have very low allocations of global capital, and that is out of sync now with their share in world's GDP. There would an irreversible flow of capital to some of the larger EM nations just to get them to parity. A little of it happened in 2010, and I expect it to continue in 2011 as well. 


Apple reported some 70% growth in its revenues last quarter - well thats not an economy in recession. It just shows that the consumer confidence is back, and its high time financial markets also start displaying that confidence. 

Nifty View

Nifty has broken below its recent highs, and is trading below its key level of 6000. Market has been bogged down by the spate of bad news and controversies, and if they do not clear in time, we may be in for pretty bad times. 


However, my view is, we are still very much in the bull phase, and will keep going up smoothly. Breaking the old high is just a matter of time, and we would very soon be into unchartered territories. Unlike developed countries, where the growth rates are pretty low, India has progressed over the past few years. So, the earnings and balance sheet are now much stronger than in was in the last bull run. So, purely from the incremental progress made in the past 3 years, we should be at least crossing the previous peak soon - may be in 2010 itself. 


I would be a buyer below 6000, and only when market breaks below 5600 I would change my views. Above 5600, I'm bullish on India. 

Market View: Bullish Break-Out

Markets world over have broken out on the upside, and looks good to rally further up from here. Nifty is already in the bullish zone for some time, whereas the big global indices seems to have joined the party now.

S&P broke above its 50% retracement level of 1130-1140, and looks good to make another attempt at 1220. If it break that, then we are all set for the re-test of previous high of 1600.

FTSE is showing more bullish signal having already broken its 61.8% retracements level. Its poised to test the 5950 levels, and then go all the way to 6750 levels.

Among the Asian indices, only HSI seems to be sharing the global bullish overtone, whereas both Nikkei and Shanghai Comp appear weak. HSI is almost in the same state as S&P, having moved above the 50% retracement level, and making another go at the 61.8% level.

Nifty seems to have broken all the resistance levels. It making an aim at the all time high of 6300. The strength of the rally suggests that it would be broken soon.

Market View: Debt Trap

I will be changing the format of posts slightly - and instead of putting up the views, will rather put some facts and information. And based on them, would try to get the scenarios done. This would help put things into a better perspective, and also throw up likely if-else scenarios. Quite often, when the view goes wrong, I'm caught clueless about 'what to do now'. 


The easiest way of starting this framework would be to state the simplest fact about the markets today - everyone is borrowing. Companies are raising equity as well as bonds (and all the fancy things that fall in between). Countries are raising debt from other countries, as well as their own citizens. Very soon, we would have a world with very high leverage, and very high debt servicing costs. Developed world is borrowing to maintain its consumption levels, whereas the developing countries are borrowing to spend on infrastructure and create capacity. 


So, what will happen from here?


1. Banks would be the out-performers: More borrowings means more business. A world with a higher debt to GDP ratio also implies very high activity levels for the banks. Credit growth would be humongous, and margins would expand as well. 


2. Companies with large free cash flows would do well: All the tech and IT companies with zero to little debt on the books would be best placed to ride over the situation. However, they would have to do with lower returns on their portfolio as long as rates are kept low. Telecom would have fallen under this category, but for the 3G auctions (and subsequent debt on the books of each of the operators). 


3. All the companies with large capital requirements and long term projects would suffer: Capital goods and real estate being the top 2 sectors. At some point, interest servicing would rise to very high levels, and any fall in business activity would squeeze them. They might do well if global economy recovers, but if there is any slowdown, they would bleed badly. 


4. ...


P.S. - Now I can slightly appreciate the consumerism in US and other developed economies. Irrespective of what the interest rate parity and fisher theorem says, people need an incentive to save money (for future consumption). And an interest rate of 1% or 2% on bank deposits is hardly any incentive to save. More so, when I can borrow also at very cheap levels. If the rates were 6% to 8%, one might give it a thought. But at 1%, no way.

Trading View: August 13

Markets haven't really been moving as per my views in the past few weeks - they have been exceptionally strong. FIIs continue to pump money into the Indian markets, making it the most stable markets even on global-down days. Downside volatility has almost disappeared from Nifty, and markets just seem to be inching up. 


There are plenty of red flags, but for the moment its more like 'ignorance is bliss' once again. The results haven't really been exceptional - with only banks and autos surprising on the upside. Rest all have been a drag on the markets at best. Telecom is almost wiped out completely out of the rally, and so is Real Estate. IT and Metals, which led to the first leg of the rally from 5000 to 5300 levels seems to have gone quiet taking recessionary global cues. Now, for the next leg up, we need pure domestic sectors, and this is where banks and autos fit the bill. Indian banks are primarily a domestic story, with negligible global operations and exposure. And so is the auto sector - with most of the supply being absorbed by local demand. Only Hyundai exports a decent chunk of its production, but thats not listed in India anyways. Other domestic stories are FMCG, and Infrastructure. If we do have a next leg up, I would be betting on Infrastructure more than anything else. 

I'm not particularly bullish over the short term, though over the longer horizon I do believe that as a whole the India story is intact, at least for the next 3-4 years. We do have a case of over-heating and excessive inflation, but these are not big issues to worry about. 

Market View: August 9

This post assumes the reader has seen 'Inception'. In case you haven't, sorry for all the comparisons with the movie. Just to give you a rem/primer on the movie, its a new version of the Matrix trilogy - with more emphasis on the construction of matrix than on action and Trinity. 

We are all dreaming. In fact, we have been dreaming for the past couple of years. The reality was bad, very bad for the human race to digest. The Americans and Europeans who had spent their lives living off their credit card debt were suddenly to be told that it was not the right way of existence. It would have led to widespread depression (not the economic variety), and panic. So, to save the world, Uncle Ben Nolan weaved this dream - that all was well again. 

He injected massive amounts of penicillin in the system, and everyone went to dream. Whether we are in the first level of dreams or further down is anyone's guess. The only certainty is that no one would be able to get us out of it - neither crash landing, and nor any kicks on the back. The dream is much better than the real world - everything appears rosy, markets seem to be making a new high every day, gold is up, real estate prices are back to their peak levels and so are the markets. There are small-cap growth stories floating all around - and there are plenty of multi-baggers waiting to be discovered. Each new guy you meet has a secret of stocks that would become 4x in no time. 

This is not the real world, and we all have been dreaming. In the real world, more than 10% of people are out of jobs. There is a massive oversupply in the real estate markets, and there are no buyers. Government debt has exceeded all their previous highs, and yet show no sign of abatement. Companies are issuing fresh equity/debt at a breath-taking pace, each one trying to go ahead of others. 

Someone would need to start pulling the brakes. Or risk a crash. 

Market View: July 28

After being a bull for quite some time, I'm turning more and more bearish on the markets. Going back to my childhood, I used to feel very happy whenever I got a raise in my pocket money. However, in the end it never mattered, and I was left with same/no savings at the end of the month. The expenses always used to catch with the free money/increment. I guess the same is about to happen with the stimulus spendings - a lot of it has gone down the drain. In the end, people would be left no richer than they were without it - and thats not a happy state as they weren't very rich to start with. 


We are coming close to end of 2010 - the time predicted for the Quantitative Easing to end. Almost three years have passed since the crisis started, and we are no where close to closing down the taps. The stimulus would continue for another year or so, and this isn't a very happy sign. Never mind the asset prices and the booming markets, its all in the dreams. Only, instead of Christopher Nolan its been designed by Ben Bernanke (and its awful). 


Nifty has outperformed the global indices, and has scaled to a new 30 month high. Markets look all set to break new grounds, and may even tough the earlier highs. A lot of FII money withdrawn from the Euro area has entered our markets (with more than USD 2 Billion flow in July). However, do not thing this is a long term shift, but just a temporary parking space. And thats what makes it much more dangerous - we are moving towards the Asian crisis scenario. There aren't too many markets with good GDP growth, and hence it may end up over-heating the handful of markets which are growing now. 


In India, the result season has been very good so far, with most of the top names not reporting any great positive surprises. Add to it RBI's firefighting with inflation, and we do have a possibility of good correction in the markets from here. I wouldn't be surprised if August and September turn out to be bad months for the Indian equities. 


I'm currently short on the markets, and would continue to roll my positions until 5600 is broken on Nifty. Earnings haven't supported to the recent upmove, and markets may find it increasingly difficult to justify their premium to the region. DIIs have been sellers for quite some time now, and FII may very soon find India too overbought. Or worst of all, some one may kick Uncle Ben out of his dreams, and he would put an end to this whole messy maze. 

Europe: The Clouds of Worry

The last time I talked about the markets, it was somewhere close to March, with the budget session grabbing the limelight. The current darling of the market seems to be Europe, and its deficit problems. Greece, Spain and Portugal, all seems to be in big trouble - and they may spell doom for the common currency. US may be breathing the sigh of relief, for two reasons - (a) Its banks are no longer under the spotlight, and relentless attacks from bears all over the world, and (b) USD would continue to be the De-facto reserve currency for the next decade at the least. 


So we have US almost out of trouble from here - substantiated by economic data as well as the market sentiments there. Asia was never under direct trouble (except perhaps fears of bubble in China). Which leaves us with the Europe and all its worries. Markets worldwide are crashing everyday on some news from the region - be it the fresh debt issue cut-offs, or the actions from the Central Bank of Spain. However, in the larger scheme of things, does rest of Europe matter? Take out Germany, France and UK, we are left with a lot of small debt-ridden countries. As long as no one is seriously doubting the debt servicing ability of the big 3, I do not see Europe being too important. They were never the growth drivers in the world economy, and there is no reason why they would hamper it either. It would cause some panic, and spike up the volatility levels, but in all, it won't be catastrophic. People on the street still do not fear for their jobs the way they did in 2008, and this indicator works way better than all the volatility indices of the world to measure the panic levels. 


I'm not saying that it would lead to nothing. There would be serious re-rating of the whole of the world. By no matrices, European nations deserve a better rating than the Asian ones. US and UK may not be as safe as they were 10 years back. It would be a slow and painful process, and every few months, some Euro-block country would be down-graded. However, it should not spook the markets, these nations are over-rated and it would get corrected soon. Very soon, some of the Asian economies might get upgraded - as early as next year.


In a nutshell, I remain bullish on the local markets. Even though the charts tell otherwise, and the world thinks otherwise. I think after the clouds clear over the European skies (pun intended), it would be smooth flying all around. 




Food for Thought: Germany bans short-selling, and markets tank. Spain merges four of its banks and markets tank. Rumors of face-off between North Korea and South Korea, and markets tank. We live in a world where people trust one yellow metal more than anything else. All in a hope that when the world ends, there would be two guys left - me and the jeweler who would buy the metal from me. 

Market View, February 12: The end of Neo-Colonialism?

Our history books taught us that Colonialism and Imperialism ended sometime in the mid 20th century. Seems like, historians were wrong all along, and it continued for much longer after that. In fact, that continues even today – most of the US and European companies now no longer produce anything, and are just a brand name that exists on people’s mind. All their goods is being manufactured by someone in Asia/Africa, exported back to them for stamping, and then sent back with 3x-10x their price tag to be sold in Asia/Africa. This is no different from the definition of colonialism as defined in the history books – except may be the difference between overt and covert. Nokia is now just a brand name which is owned by Finland, and rest everything, from manufacturing to end consumption happens in emerging nations. And the parent company just earns a royalty for owning the name.

Well, one might argue that this is the crux of outsourcing, and this makes a company much more efficient. But then, it might become even more efficient if it was registered in India/China, instead of Finland – which is neither the biggest producer, nor the biggest consumer. The reason for this is plain and simple – those guys are really smart. For US, once you own the world’s reserve country (and the nukes), this ensures you directly or indirectly control the world (just make sure everyone signs CTBT). And European nations feared that since they didn’t have any pricing power in the world economy, they decided to form Euro. The only purpose Euro serves is, it gives more clout to all the Tom-Dick-&-Harry European nations, which otherwise have much worse economies than their Asian peers. And this makes me believe that we are about to enter the stage two of the credit crisis.

There are two standard tricks of financial alchemy for a listed firm – merger or demerger. Neither of these changes anything on the ground, but it does create an interest in the stock, and there are always either synergies or value being unlocked. As long as you can show that something can create money out of thin air, you are on track. This was the exact same thing done in the two different versions/stages of the credit crisis - (a) The US version, and (b) The European version. In the US version, or the first part, people were made to believe that slicing and dicing of tranches can create magic – and give AAA/AA rating to a large chunk of sh*t-pile (equivalent of demerger). There was value being un-locked by cutting the cake, and the sum of parts were more than the whole. This went on for a few years, and then it went bust (nice to outline and prophet-ize in hindsight). The problem was not the fact that pieces were cut and sold separately, but somehow the sum of the parts created were supposed to be more than the initial pie.
The European version, or the 2nd leg which is unfolding at the moment (it appears) is the exact opposite of this. There the core belief here is that if you combine a good thing and a bad thing, somehow you get something which is almost as good as the good thing. This was actually true in the initial stages when there were only 10 countries in the bloc, and all 10 were strong ones with good GDP and fiscal situations. Then Euro went on an expansion mode, and tried to include more and more countries – all the while maintaining its ‘good’ thing image. Here, somehow the whole was greater than the sum of parts, and it was assumed that addition of a country into Euro was net net a value-accretion exercise. This let the new country reduce its own risk (and cost of borrowing), and had no impact on the existing members. Its high time market call this bluff, I hope to see this bubble burst soon.

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Markets globally traded a little weaker this week, and some of the Asian indices are below their 200 DMA. Usually, this is a strong bear-ish indicator, and I’m assuming that unless they prove its a false breakout (by closing above the level in the next week), markets are in for a ‘W’. I have been quite bullish for the past 5-6 months, but some how think that now we have reached the top of where ‘freedom to print’ can take us. Quite a few IPOs have bombed in US (as well as cancelled), and very few have made money in India as well. Most of the companies are now scared to market the issue, and NTPC might turn out to be the final nail in the coffin (unless Reliance Infratel is coming soon, which I haven’t heard). Another reason for the ‘top-has-been-made’ view is the fact that we are exiting the stimulus period, and most of the recovery was seen in those sectors only. China finds itself in a mess, and so does Europe. Germany is doing exactly what AIG did for Freddie and Fannie – writing blank cheques against tonnes of crap, and hoping no one notices it. ‘United we stand, divided we fall’ is quite true, but people are forgetting ‘one rotten apple spoils the whole basket’. 

On Nifty, expect the market to re-test 4650 levels, and it might be broken by the budget. There is huge selling pressure from the FIIs, and once the tax-backed buying ends, the domestic institutions would also stop supporting the markets. By then, unless the FII trend reverses, we are in for the big ride.

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Food for Thought: The big news out of India is that Hang Seng Index ETF is being launched from monday, and it would be traded after a couple of weeks of NFO period. I hope this provides some push towards more investor interest towards ETFs in general. Hang Seng might not be the most important market from an Indian investor’s perspective, but it is one of the very few non-restricted market which trades during our market hours. Once this one picks up, I guess S&P or FTSE might be next.

Feb 2010: The PIIGS are back!

Everyone thought Swine Flu is history, or atleast not as threatening as it appeared to be initially. However, they are back, and this time in the form of PIIGS – Portugal, Italy, Ireland, Greece, Spain. They had the world markets go bollocks for the whole of last week, and the danger looms large even now.

Well, to me, it was no new news. Everyone knows that more than half of the Europe, and almost all of US riches are a giant Ponzi scheme, and the end payers are the unsuspecting tax-payers in China and India. None of those economies actually produce enough to feed themselves (this includes all the goods, not just food), and end up spending more than what they earn. Its not just the government which is at fault, but more so the common man on the street. The toughest task Obama has is to tell the Americans that their lifestyle needs to change, and they need to work harder. Till now, he has failed miserably there – and instead tried passing up more perks in the form of Health Bill.

Back to Europe, here the task is much more tougher as they do not run the USD printing press. These nations would ‘NEED’ to get back their deficits back down to respectable levels, and how they would do it (apart from some accounting jugglery) is not clear. Geo-political tensions would certainly rise in 2010, and we may have one of the hottest years in recent times (another fact that 2009 indeed was the hottest year in India even weather-wise). Google has been boo-ed out of China, and Toyota and Honda might face similar back-lash from the public (with government support) in US. China controls the triggers to the world relations now – in form of its huge UST reserves. Sooner or later they would start converting them into other hard assets (commodities), equity stakes (in foreign companies) or some other currency.

I do not think 2010 would be a very calm year in any of the markets, and there would be storms. We wouldn’t see smooth up-moves in the markets like 2009, and there could be periods of high volatility. There is high unemployment in the world, coupled with high inflation and free money. Sometime down the line, something would give away – this state can’t continue for long. Its a waiting game from here on, and I would rather be on the right side of the gamma.

In India, markets after trading around 5200 for more than 3 months finally broke on the downside. The RBI raised CRR by 75 bps, and signaled its intension to drive down inflation (raise rates). At least, they would not be increasing the stimulus for sure – so its only downhill from here. Same is the case in China, and it too is on a tightening path. Think this would bring the earnings down – from their record numbers last quarter. The worst affected may be Auto sector – this sector has seen phenomenon rise in volumes, and almost all the stocks are trading at their life-time highs. And whatever Livermore has to say about it, its very difficult mentally to buy the stocks at their lifetime highs – more so now as these are caused by fund flows and teaser rates. Real Estate seems to be the paradox to me here – the property rates and volume are also close their highs, whereas the stocks have been beaten down out of their lives. Either the rates would come down (and the volumes being reported are incorrect), or the stocks would move up. Banking seems to have corrected substantially after the RBI meet, and I would be over-weight on the same – lending is happening at a great pace, and the NPAs (which are a worry) would hit us with a lag. In the coming quarter, the results would show increased lending activities only (albeit at lower margins). One interesting sector I have added recently is cements, and would be posting on it next time – seems to be a relatively simple sector, with classic Economic and demand-supply factors at play.

I’m not quite clear now on the direction of the markets, and think there is a decent chance of either way movement. This is as good as saying something is either right or wrong, but that is the way I feel now. The only trade I can think of is buying OTM options (or rather strangles), but then, very rarely people make money that way. So, would give the markets a pass for this week, and wait for more clarity from here. The next action point locally is the budget – and as usual it would be a pro-people budget. STT might be the wild-card, and if abolished/reduced, could lead to another pop-up.

Food for Thought: Jesse Livermore is one of the most respected trader ever, and he has set down a few rules for trading. His fictional life story is a bible for all those who want to understand trading in a very informal way. Some of his most quoted sayings are as follows:

"There is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again."

Trading Rules:

• Buy rising stocks and sell falling stocks.
• Do not trade every day of every year. Trade only when the market is clearly bullish or bearish. Trade in the direction of the general market. If it's rising you should be long, if it's falling you should be short.
• Co-ordinate your trading activity with pivot points.
• Only enter a trade after the action of the market confirms your opinion and then enter promptly.
• Continue with trades that show you a profit, end trades that show a loss.
• End trades when it is clear that the trend you are profiting from is over.
• In any sector, trade the leading stock - the one showing the strongest trend.
• Never average losses by, for example, buying more of a stock that has fallen.
• Never meet a margin call - get out of the trade.
• Go long when stocks reach a new high. Sell short when they reach a new low.
• Don't become an involuntary investor by holding onto stocks whose price has fallen.
• A stock is never too high to buy and never too low to short.
• Markets are never wrong - opinions often are.
• The highest profits are made in trades that show a profit right from the start.
• No trading rules will deliver a profit 100 percent of the time.

Market View, January 5: Give me some Sunshine

“Give me some sunshine
Give me some rain
Give me another chance
I want to grow up once again”

How fast things change – exactly a year ago it was Armageddon all around the world. And markets worldwide pleaded the central banks for some respite from the relentless selling and lack of confidence. The central banks reacted the only way they knew – banning short selling (so that no one could sell), and printing money (so that atleast they had the money to buy the shares/mortgages/xyz).

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Last week I was wondering about the fund flows in the emerging markets, and the final data for 2009 does confirm what I had suspected. That 2009 was indeed the year with perhaps the highest amount of capital flows into the Emerging markets. In the Indian Equity markets alone, FIIs pumped USD 18 Billion – slightly higher than the previous best of USD 17 Billion in 2007. This takes back the overall FII holdings in the overall market back to the highs of 19-20%, and hence there is very little room to grow further. Any incremental flows (which is very probable) would have to come from the promoters’ holding (via the IPO and FPO route). And this is indeed going to be the story of 2010 (if the run continues) – more than USD 10 billion worth of new issues could hit the markets. Another interesting recent change has been that the past few IPOs have got listed at a premium – a good change from mid-2009 when all the IPOs and QIPs were opening at a steep discount. Starting with Oil India, most of the recent IPOs have opened at good premium to the offer price – COX and Kings, JSW Energy and Godrej Properties.

On the markets, I continue to hold the bullish view, and think that unless budget is a real dampener, we are going all the way up (all the way bole to 6000). Yesterday, I was reading a very nice report which stated that past 2-3 years have been dominated by macro themes, and stock performance really didn’t matter. However, 2010 might be different, and we can already see vast difference in various sectors’ performance. Whereas the Autos and IT is trading at their lifetime highs, Real Estate and Telecom are closer to their lifetime lows. So, stock picking may be much more important this year than has been in the past couple of years.

INR seems to have turned around the corner, and am still expecting it to go all the way up to 42-44 zone. The flows have improved, and even though the trade balance continue to be USD -10 billion/month, the trump card could be the KG Basin and Cairn Energy’s fields. Whenever their production kicks in (some time in 2011), the Oil import bill would go down, and we may see strength in INR. So, unless the FII flows completely reverses, we may see continuously appreciating INR over the course of the year.

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Food for thought: Everyone in the world believes that China and India would drive up the world growth in the coming days. And yet, Chinese markets have been quite subdued in recent times – in fact they have taken a beating couple of times on fears of bubble. So, this is slightly confusing – I would expect China to be the best performing market rather than Brazil or whosoever it was in 2009. Add to it the fact that the country would start trading Index Futures (till now there were no index futures!!!) in March 2010. Watch out for the Chinese market performance this year.
P.S.- Index Futures were introduced in India in 2000-01, and the markets almost quadrupled in the following 5-6 years. And much like India back then, China still is a locally driven market.

Market View: December 23

Markets have been trading in a range now for more than 2 months, and everytime it tests the barrier at the end of its channel, it reverses back violently. Seems like it would stay within this range for eternity - but then, it appears this way most of times before the final break-out happens. The key question now is not whether the market would break-out, but when.

A lot of participants have lost hope of break-out this calender year, and believe that the next few days would be calm. The implied and realized volatility are both at their 1-year lows. Implieds went below 20 perhaps for the first time this year, and even the US VIX has taken a dip into the sub-20 ocean. Just for the point of comparison, the 20 year average for VIX has been 20, with high of 89, and low of 9. So, we are currently standing at the historical average level of volatility. I think this is a very good time to buy long term volatility (1-year) - just for the comparison, this is how the 1-year realized vols on Nifty has moved:

2001: 26%
2002: 17%
2003: 20%
2004: 29%
2005: 18%
2006: 27%
2007: 26%
2008: 45%
2009: 35%

I'm assuming the volatility next year should be somewhere around 30 (on the conservative side). Remember, most of these years have been bull market period with low volatility, so the current sub-30 volatility is indeed a very good buy.

My view on the markets is again back to bullish - too much of liquidity still waiting on the sidelines, and even though fundamentally valuations have got over-stretched and everything, I think we have steam left to go all the way upto 6000 on Nifty. Banks have become very aggressive on increasing their balance sheet, and this is after a pause of around 2 years. So, am assuming with increased lending, we would see economy coming back to higher growth levels, and corporates having access to easy liquidity in form of debt. All the corporates who have been running a tight leveraged scenario, and have taken a beating, might be the best performers over first half of next year. I think likes of Suzlon, Unitech, DLF, Idea, ICICI and Tata Group would be out-performers.

On the sectroal front, I think Autos have run out of steam as well as good news. Already sitting at the record sales numbers for the past 3 months, I guess its time for some correction. The vehicle sales would continue to surprise over the next 3-4 months, but most of that has already been factored into the current prices. I think market leaders such as Hero Honda and Maruti may be weak from here going forward, whereas Tata Motors may outperform relatively.

Banks would be the big sector next quarter, and whether they are able to take the shock from RBI measures would determine the market direction to a large extent. If the sector cracks (in case of hawkish measures), then we may see weakness in the whole market. However, my feel is that RBI won't be too aggressive in tightening, and we may see record loan growth over the next few quarters. I would go long the banks at the current levels, and review the position after the RBI policy announcements.

On Real Estate, I'm largely bullish, and think there would be huge upside in the sector over the next year. There is a huge pent-up demand, and I think the sector would return back to its glory days of 2006 and 2007. There would a sharp rise in housing activities, as well as trasnsactions happening.

 

Credit Crisis and Banking Bonuses

If last year it were the CEOs of large banks who were on the firing line, this time around its the banking community which is facing the backlash. And the worst part is, its the politicians who are meting out the punishment.

Yesterday, UK passed a special one time tax on 2009 year-end bonuses. This is in addition to the income tax payable by the employee. Somehow, the blame for the whole crisis has passed on to the banks, and more specifically to the bank employees. Which is as good as blaming Vijay Malaya for your the drinking habits of society, or the Casino owners for all the money lost by gamblers. Everyone is supporting the cause of middle-class which has been short-changed by the bankers. However, what everyone is conveniently ignoring is the underlying greed of effectively the whole world. Banks are responsible only to the extent of ‘selling dreams’ – they enabled people to buy houses and maintain lifestyles which they otherwise couldn’t afford. How on earth does one justify every T, D & H in the world buying 1 MM worth of houses?

Banks just earned their cut (which would be 1-2% in the whole transaction). What about all those property developers who sold their apartments at 200-500%  premium to their pre-crisis levels. It is them who made the biggest profit out of this whole mess – and yet, no one is pointing any fingers at them. Banks have been caught napping, just like the rest of the world. And to a large extent, they are in the same boat as everyone – fooled by the crisis, and lost all their equity.

I’m not a supporter of complex financial instruments per se – but somehow I think its not the complexity that took the world down. It was simple plain vanilla naked Greed which caused all this mess.

Market View: December 9

This was to be the year of surprises, and hence, it was apt that the last couple of months were also on a predictable trend – defying all the expectations and market views. There were people who were clamoring for a year-end rally (including myself), and then there were the Bears who thought sanity was just around the corner. However, it was not to be – nothing happened in the last few weeks.

Apart from the shocks of Dubai (where everyone over-reacted, and then quickly forgot all about it), and downgrade of Greece (which almost no one took notice of), nothing has really happened. All the central banks have continued to stand by their expansionary policies, giving their own sets of reasons. Gold crossed over its previous best, only to come down again (though might go up on another round of central bank purchases), and EUR also is getting closer to its highs. There is a high chance that this would be a quite year end – and a small chance of a small correction.

I’m not bullish on the markets anymore, and think the rate hikes would start earlier than most people anticipate. Inflation is going through the roof, and if the government has to even perform lip-service to the poor strata of the society, then they would need to at least try to bring them down. And whatever they may say, inflation is not totally a supply-side problem in India. Give them loans at 7-8% (which is the trend now), and you know that people would buy almost anything. Markets seem to be running out of steam (though this may be the December effect also with lot of money managers on vacation). 

Gold Cross $1200: Way to Go

An interesting milestone was reached today in the markets, and Gold finally broke through the USD 1200 barrier as well. With the Central Banks of China and India standing in queue to buy more and more Gold from IMF, I think this would go a long way up from these levels as well.

I would think even a level of $1500 is possible, and would buy gold at these levels also. Its common knowledge now that most of the reserve rich nations want to diversify out of USD, and in absence of any credible alternative, will stock up Gold for the time being. I think Gold would the thing for the next few years, and may see newer peaks in coming days.

Market View: November 27, 2009

Something Is Not Right!

Markets were spooked by the Dubai storm, and bears finally had their long awaited wish. Everything was falling, and people rushed to buy protection. Nifty futures were back to trading in discount, and it seemed like bear market was back.

Nifty opened close to 5100 on the expiry day (26th day), and traded in a range for most part of the day. However, towards the end, it succumbed to the global pressures, and went into sharp fall. Thankfully US has a Thanksgiving and so it didn't add anything to the fall. And today as well the markets continued to fall amidst higher fears on the Dubai default (which seems unlikely, and a clear case of over-reaction currently. Unless...). Nifty touched 4820 levels, but recovered soon after HK closed, and went on to regain most of the fall. It finally closed at 4940 levels - quite a rally from its intra-day lows.

As I write this, Europe has re-bounded, and is trading in green. However, I think even if Dubai is averted, there are others waiting to explode. Its a liquidity rally, and nothing more than that - and NOT A RECOVERY RALLY. We are still groping in the dark about the way forward. Spain is struggling, Ireland is close to default, and now Dubai joins the list.
I would be surprised if this party continues for another year. I would be happy to buy Nifty 5000P December 2010 at current levels. Something doesn't seem to be right in this rally - and I don't know what.

Market View: November 6

Markets have been making a fool of bears for a long time now, and there was nothing new in its behavior over the past couple of weeks as well. Initially, it appeared that all the bulls have gone quiet taking a breather, and bears came out with their daggers. A week of fall in the markets, and we all thought ‘This is IT’ – a phrase which eventually got related to Michael Jackson more than the markets.

So, it wasn’t this time again, and the party continues. US has made it very clear that they aren’t going to raise the rates anytime sooner. Effectively, they would continue to write blank cheques, and the champagne would keep flowing.

With all the talks of rates hike marginalized, I go back to my bullish stance, and think that the round for correction is over. Now, we are back to listening to the Rally Monkey chants. Last year, there was no year end rally, but this time around, there may be one.


Food for Thought: Markets for the last couple of years (from when I have started observing) haven’t changed their trend in the months of November and December. In 2007, the party continued late into the night, and the music stopped early in January. Similarly, in 2008, the markets continued to fall down, and only recovered in March. So, in both the years, November and December just continued the overall annual trend of the market. And think it would be same this time around. If not a sharp rise, we shouldn’t end lower than the current levels.

Market View: October 23

Nifty Movements: Nifty lost some of its gains this week, and ended the week a shade below the mark of 5000. However, the market was quite strong, and despite the bad news from the RIL front, managed to close flat on today. Think the market would continue to hold over the short term, and may end the year at a high. Usually, markets do have a tendency of rallying close to the year ends, and if that happens, we may be in for another 10-15% up move from here.
 
Stocks: Telecom stocks have been very weak recently, and they continued to be under-performers. Real Estate also faced sell-off for a couple of days. However, the big under-performer has been RIL – marred in controversy and court battle, and then the Hardy pullout. IT companies surprisingly have held out well in spite of a stronger outlook on INR, though going forward we may see some weakness there. Another sector to watch out for could be the metals, with bad news expected from China.
 

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Next Week Views: The main risk remains the Chinese markets, and if the news coming out of there about the overheated economy and inflation concerns indeed is true, then we may see weak markets. However, there is not much bad news coming out of West at the moment, and if the results continue to surprise, the markets may even accommodate modest bad news from China.
I think we are standing at some sort of an inflection point – there are people who believe markets would reach new highs, and there are people who believe we are in the middle of a ‘W’. And the rational from both the sides seems to make sense. May be, this is the way markets are designed to be – capturing all the present information, and standing well in balance. I haven’t seen a bull-run from a trading floor before, so am not sure how they appear. Were there equal number of skeptics way back in the bull markets of 2003-2007 as well?

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Food for Thought: How do you think the consumption patterns would change in the next 10 years? What would be the next generation consume more, and what they would consume less? I think all the things traditional would be consumed less and less (in value terms adjusted for inflation). And people would consume more and more technology. Just like there has been a great shift in ‘Telecom’ consumption over the last decade, I think people would consume some technology a lot more than what they are consuming now. If I have to put a bet on different industries, this is how I would think:

1. IT wouldn’t remain an industry servicing large brick-mortar corporation. As more and more things start happening online, more and more IT services would be consumed by all organizations. And I would think there would be a drastic shift in the IT-related expenditure for all firms.
2. Telecom would continue its march, and might develop into the biggest industry. Most of the telecom companies would offer all sort of communication services – Television, Media, Broadband, and Telecommunications (they have already started). I think the opportunity here is huge, and we have just hit the tip of the ice-berg. The usage for the communications would increase greatly, and if somehow they manage to replace the credit cards as payment options, then it would be unprecedented. And I see nothing that a credit card offers which a mobile phone can’t do better.
3. Media/Entertainment: This is another industry which I would think would grow. Currently media is not being priced correctly, and most of time people make bundled payments (when paying for all the channels). With selective view-based pricing, and more and more cities coming under the multiplex chain, media revenues make take a quantum leap sometime in the next few years (with multiplexes opening just in the metros, the revenues from movies leapt from 10-20 Cr average to 50-60 Cr average).

Rally Monkey: Still Playing At a Market Near You

Nothing describes the current markets better than the Rally Monkey music. This one has to be played out loud in the office during the market hours (you will need to turn ON the sound on this page).

Disclaimer: The webpage actually has nothing to do with the markets, but all the investors indeed dance to similar tunes :)

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The markets have been correcting for the past few sessions, and daggers are out on the sustainability of the rally. A growing number of people believe that the markets have run up too high, and are long overdue for a correction. Well, I’m not completely bearish even now, and think there are still a couple of legs to the rally. I might be wrong here, and might have to eat my words pretty soon (for October isn’t over yet), but I would still stick to the long view.

Oil is back at $80 levels, Gold is trading at record highs, EUR has gone back to 1.50 levels and Equities are almost at their early or mid-2007 valuations. But China is still 50% down from its peak. The country best placed to avert the crisis, inspite of all the steroid-led growth stories, hasn’t seen too much of a recovery. And even though it makes sense (as China’s growth is led by export to US), I don’t think US would remain with 10% unemployment numbers for a long time. And hence, there is a strong case of rise in Chinese stocks, adding another leg to the global rally.

The underlying rational for all my bullish thoughts is the assumption that US isn’t going to have a lost decade. Japan’s case was different – Yen wasn’t the world’s reserve currency. Here, US is the master of the world – and any holes in its economy would be plugged by Qatar or Singapore or anyone else. There is a strong queue waiting to bailout US, for its the safest asset in the world. And as US comes out of the crisis, the whole world would follow, sooner or later.

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Food for thought: I got an answer to my long puzzling puzzle of why markets tend to go up more often that not. Money Supply growth is quite large compared with the World population growth, and hence, with each passing day, world is getting richer and richer. And there are only two avenues to use this money – consumption or investment. Inflation measures the rise in consumption demand, and rising markets measure the rise in investment demand. And since the marginal propensity to consume goes down as income increases, the rise in investment demand increases more than the inflation. And hence, the world markets are in perpetual bull runs.