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.

Correction On The Cards?

I have usually been a bull in the market, even before many lost their shirts in the 2009 up-circuit. Over the past few years, though, market has gone almost nowhere. Post the 2009 post-election rally, the market reached about 4500 levels, and has been stuck around there for long. I would think that we would be breaking the all-time high some time this year - the flows have been good, and there are enough sectors which are driving the markets globally. 

For the short term, however, am not too positive, and we can see a break of 5200 levels on the downside next week. Being the last week of the month, we would see good volumes, and unwinding of large positions. The budget has been a disappointment, and there are now noise around some ratings action on India as well. While there may not be an immediate ratings cut, however, a positive action is now out of window for a good time. Plus, the noise around Vodafone tax settlement case is not helping matters either. 

Nifty View: March 2

Markets continued to consolidate around their new found highs, and is waiting for verdict from state elections. 5200 should be well supported on the downside, and I would be happy to play for the bounce. On the upside, any positive results from the local events would result into a break of 5400, and a potential re-test of february highs. There has been some weakness in the market post the spectacular run in the first few weeks, but the longer trend is still positive. Rate sensitives to see fresh action before the RBI policy meet.

Gold To See New Highs?

I have always been a bear on Gold, and like so many traders, always viewed the yellow metal as some kind of a bubble. But I have been proven wrong so many times in the past few years on this that I have lost count. Apart from human population, perhaps the yellow metal is the only thing which has been following an upward trajectory for a long period now (may be Apple shares as well, but thats a whole different level of madness). 

As I think more over it, fundamentals aside, the demand for Gold has been rising. Earlier it was just from India, but now China has also joined the race and is expected to surpass India to become world's largest gold consumer. Everything thats being valued and demanded by Asians should keep moving up, and Oil is one prime example. So, may be, the prices have been right (as they always are), and Gold bull run is here to stay. We may see higher and higher prices on Gold in coming days. 

I would start adding a little gold to my portfolio, and see how it performs over the next few quarters. I'm hoping it would outperform the bonds over the next five years period (bonds being a nominal return asset). 

Markets From Here

The second tranche of LTRO has been announced, and now officially the world is floating in cash all over. We have the US, which started this race to the bottom, and now being joined by Europe and Japan. US may have got itself a pretty good deal by getting in the game first, and hence recovering before everyone else. Europe may be the last one to react here, and hence find itself on the wrong end at the wrong time. No one bothers about Japan anyways. 

Which leaves us to the emerging markets (which for some weird irony of fate have been taking far too much time to 'emerge', if that was the intension of putting a present continuous tense in the name). China has remained an enigma to everyone, loved by everyone, and now universally acknowledged as being the next superpower, the stock markets there however have just not moved. Till today, Chinese stock index has lagged almost every tom dick and harry markets. If I have to choose one market to bet on, I would bet on China. And may be there lies the problem, its too much of a consensus trade. 

India, on that other hand, has been a beneficiary of the cheap capital flowing globally now. The government has done everything it can scare away the potential investors in the markets, and yet people have been putting money in the markets. The latest blunder being made by the government came today in the form of ONGC auction issue, with failed to be covered fully. With stock at 283, government had a bright idea to auction the shares at 290 (not withstanding the fact that it isn't 2007 now, and FIIs are not exactly lining up to put more money). There is a mix up incompetency and arrogance in this government, and I can't make my mind which of these is causing more harm. 

Anyways, as the cheap money keeps flowing, its Game On, and Nifty continues to move up. Next week should be interesting with state election results. I would put my money on the results being marginally positive for the markets, and would keep the long position here. RBI meeting on the week following next, and widely expected to cut another 50bps in CRR. Dance till the music is On, anyways no one bothers about what happens when the music stops. Its 2012 anyways, and you will never realize what hit you. 

Don't Blame The Quants!

Much of the past few years have been spent in trying to analyze the crisis, and the causes of recession. Banks have been the obvious targets for many, and more specifically, the quants. The financial world has turned very complicated, with numerous quantitative analysis, and all the models. So, its very easy to just take a look around, and find the scapegoat in people who created these complexities. 

However, what may be appear very simple at first glance may not be entirely true. Over years, complexity has indeed increased in the financial tools, but along with it, the size of the industry also increased. So, whereas earlier only say top 1% of the class were selected for top markets jobs, as the industry boomed we had top 5% being getting selected. When profits rose in the industry, hiring standards nosedived (I can't elaborate this further, but one can easily get the drift), and as a result, analysts raced to bring coffee for bosses instead of working hard. The models were not the problem, over time their users were less and less sophisticated. And as it should have happened, everything went belly up. All the so called correlation hedges blew up when they have actually needed. Blaming quants for the crisis would be akin to blaming Sir Alfred Nobel for Hiroshima, or Wright Brothers for 9/11 attacks. 

So next time you meet someone who blames the quants for the crisis, you will know you are meeting someone who actually caused it. 

IPOs in India: Worth The Hype?

The first and foremost topic that comes to mind when I think of Personal Finance is the stock market, and more specifically the IPOs. In India, one should always follow this thumb rule for IPOs - Never ever put money in an IPO, more so if its from private sector. 


The reasons are pretty simple. The rational for IPO in an ideal world is for new and relatively small companies to fund their expansion, and hence offering relatively good growth potential compared with matured companies. In India, however, most promoters access the primary markets to offload their stakes, and only after the company has either already grown decently, or hasn't started as yet. There are very few of the actual IPO-worthy stocks. And, to make matters worse, the pricing of the IPOs are done pretty aggressively, and there is usually nothing left on the table. 


Little wonder most of the IPOs list in deep discounts in India, and they only tend to do well in absolute bubble scenarios. One exception could be the public sector companies which would be divested one by one - there the owner is government, and they do not have a 'personal' incentive to suck the last penny out from the investors. And secondly, they tend to offer some good discount to the retail investors as well. 


So, my mantra is, never go for an IPO in the first place. And if you must, because your neighbor's son is making millions in IPOs, then just limit yourself to the public sector divestment offerings only. As for the private sectors ones, if you can wait for a few months, you may have them for a good 15%-20% discount. 

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.