Thursday, February 18, 2010

Automobiles Sector: 102

Earlier Post: Automobiles Sector Basics: 101

Automobiles are again a relatively simpler sector, and the most important data to look forward to are monthly sales numbers, margins, sequential growth, dealer inventory (short term), demographics, penetration levels (long term).
A very brief look into each of the companies, and their monthly sales numbers:

  • Maruti: Sold 100,000 cars in Dec 2009, highest ever. Expected per month run rate is 70,000 to 90,000 going forward. The big growth driver is from the exports, which now account for close to 15% of the overall sales for Maruti. However, there are concerns with new global players eyeing the market in 2010, with some new models.
  • M&M: There are two separate divisions – (a) Automotive consisting of 3 and 4 wheelers, and (b) Tractors. Overall monthly numbers were 36,000 in the month of Dec 2009, and the about 1/3rd is from Tractors. M&M has seen a very high volume growth over the past one year, and that should explain some of the gains in the stock price.
  • Tata Motors: Tata Motors too caters to too very distinct segments – (a) Commercial Vehicles, and (b) Passenger vehicles. The overall sales numbers in Dec 2009 were 51,000, and bulk of the sales is in the domestic market (with less than 5% exports). Also, the recently introduced Manza and Magic are receiving tremendous response.
  • Hero Honda: The Company is reporting rise in the vehicle sales month after month, and the current run rate stands very close to 400,000 units per month. Also, the company plans to introduce 3 new products/variants in the next 2 months. The company is currently operating very close to its total capacity, and hence a great uptick from these numbers is unlikely.
  • Bajaj Auto: Bajaj is fast catching up with Hero Honda, and has a good presence in the premium bike segments. The monthly sales numbers currently stands at 250,000, and these are mostly from bikes.
  • TVS Motors: A relatively smaller player in the sector, with monthly sales of 110,000 units (mostly bikes and other 2-wheelers)

Friday, February 12, 2010

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.





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.





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.

Sunday, February 7, 2010

Technical Analysis 102


There are broadly two types of trading opportunities:
  1. Event-based Trading
    • View on rates
    • View on FX
    • FII Flows
  2. Short Term Trading
    • Chart Patterns
    • Fundamentals – Industrial Production, Inflation, GDP, RBI announcements
    • Derivatives Markets Information – PCR, SF Basis, SF OI, Nifty OI, Nifty Basis, Volatility, Options OI, Strike Distribution, Skew
    • Institutional Activity – FII, DII
    • Regional Markets, Global Markets
    • Commodities
    • Currencies

On Chart patterns, some specific averages are followed by a vast majority of technical analysts:
  • 10 Min MA
  • 10 HMA
  • 10 DMA
  • 10 WMA
  • 30 MA
  • 50 MA
  • 200 MA
  • 500 MA

Some specific points to keep in mind:
  1. If the market opens gap-up, and immediately gets weak (selling starts), the day’s high may be made in the opening few minutes. In addition, markets usually close at day’s low.
  2. If after opening gap-up, markets continue to trend up, then it might keep on going up over the day.
  3. Gaps get filled 80-90% of the times, and hence there is a decent chance of market coming back to the gap levels.
  4. If the stock futures basis is strong, it implies more speculators in the market. Any negative news would lead to large moves in the market.
  5. If Index futures trading at a premium, then hedging activity with Nifty futures is very low. Again, any negative news could lead to large moves in the market.
  6. If the stock futures OI increasing and premium is rising, then retail speculative interest is building up.
  7. If one can’t roll the positions, the same is unwound in the cash market in the last 30 minutes on the expiry day. Stocks which have been trading at a discount (and hence have short stock, long SSF positions) would rise in the last 30 minutes.

Technical Analysis 101

I have started reading a bit about Technical Analysis once again, and here I would note down all the important points so that I do not have to get back at the bulky books again and again for future reference.

Introduction

Technical Analysis is the study of patterns – price, volume or any other variable. And it is based on a few fundamental principals:
  1. Everything is discounted and reflected in the market prices: All the knowledge about the specifics of the company and sector has been captured by the prices, and any movement is purely based on supply and demand of its stocks. Here, it implicitly differentiates between the underlying company (real world) and its stock. The stock price moves purely as a function of its demand and supply. In other words, Price is King.
  2. Prices move in trends and trends persist: It means here that there is a trend in motion due to interplay between demand and supply. And once the trend is set, it continues for some time unless there is a clear reversal. It assumes here that not all people react at the same time, and hence once there is buying in a stock, it would go on for some time. As they say, ‘Trend is your Friend’.
  3. Market Action is Repetitive: Certain patterns appear time and again on the charts, and it means that people behave in the same way as they have in the past. People react similarly in similar situations, and this can lead to identify major tops and bottoms.

Basics of Charting
The most important indicators are related to price, volume and open interest. While tracking prices, one should keep in mind that there are usually 4 prices which are important – Open, Close, High and Low (for each period). In terms of volume and open interest, they are usually read in conjunction with the price action, and independently do not signify anything.

Important Chart Patterns
  1. Reversal Patterns
    • Head and Shoulders Pattern
    • Ascending and Descending Triangles
    • Rectangles
    • Double and Triple Tops/Bottoms
    • Rising and Falling Wedges
  2. Consolidation Patterns
    • Flags
    • Pennants (Triangles)
    • Symmetric Triangles
    • Head and Shoulders Continuation Patterns
  3. Gaps
    • Breakaway Gap
    • Runaway Gap
    • Exhaustion Gap
    • Island Reversal

Saturday, February 6, 2010

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.

Tuesday, January 5, 2010

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).

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.

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.

Wednesday, December 23, 2009

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.

 

Thursday, December 10, 2009

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.

Tuesday, December 8, 2009

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). 

Tuesday, December 1, 2009

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.