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Dear MMS,

First of all, I am not a celebrity nor a supporter of your party nor a politician by any length of imagination. So, this open letter may remain just that a open post with no one reading. Still I felt the need to write this since for small persons like me, the Internet is the only way to express our views and feel satisfied that I / we have done our duty in trying to put across our views on how the country should march ahead (not that you have a deficit in the number of Advisors, I think you would have one too many).

 

Till 2004, you were known as the man who opened up India‘s Economy, the man who could be looked forward to a great and glorious India. A man who was kept on the same pedestal as Nehru & Gandhi. If Nehru and Gandhi brought us Independence in one way, you brought for a large majority of us, Independence in another way – Financial Independence so as to speak.

 

 

While getting jobs were a major issue in Pre MMS era, Attrition came to be known as the key word post 2000. But post 2004, when the we had the dream team (think of it as the replica of The All-Time ODI Dream Team in Cricket) with you being the Prime Minister and Chidambaram being the Finance Minister, our hopes have kept on sinking. While first it was said that the Left which was the major cause of you having to neglect your core philosophies, post the Nuclear deal, even you have lost that excuse. Its now as if that you and the team are no more the same that was in 1992.

It is in this environment that you came up with FDI and I for one felt happy that maybe finally the real MMS is beginning to take charge. While its another matter that you were made to with-draw, the fact that you did take the call gladdens my heart with hope that maybe not everything has gone to dogs. Maybe there is still some hope left despite the fact that we have now lost close to 7 years which will take a toll in the future. A study I read said that any major reforms took 5 years for its full benefits to be visible. So the good deeds done during 1999-2004 have had a major play in my opinion (alongwith the global boom in everything). But now we are back to a stage where we either have to take crucial decisions or let others (China, Brazil, even smaller countries) walk away with the glory of the win while we continue to whine about on our state of affairs.

 

One of the biggest problems facing India is lack of Infrastructure. Every city is said to be in ruin (be in Mumbai or Bangalore, we have our fair share of problems that will take years if not decades to resolve), connectivity is missing for a large part of India. Connectivity is carried out in 2 major ways – Road and Rail. While there has been some amount of progress in Road

 

 

Transportation, we for some reason have left the Railways to rot (though compared to Pakistan, we seem to have kept it in much better shape – the one we were handed over by the British).

When we got Independence, the Railways occupied the dominant position of transport in India. But since then it has been on a steady decline. While we have minister after minister announcing launching of new trains (most of them to their home states), we are also seeing a gradual erosion in the infrastructure which is being blamed for the number of accidents that happen regularly.

 

The Railways have been loosing market share for a long time now. While it commanded 78.50% of Freight Traffic and 60% of Passenger Traffic in 1950-51, this has now come down to 25.75% and 17.68% (Please see the pic taken from a report here http://twitpic.com/7r5iss ). This despite the fact that Rail Transport is one of the cheapest and most efficient way to transport goods and people. But without adequate infrastructure, people are forced to check out other means even if that means paying extra. After all, time is money for everyone and one cannot compensate on time in order to save a few bucks.

 

One reason I fathom for this kind of fall has been the fact that while on one hand the Railways by themselves having determined that they are social institutions and hence cannot charge higher fares are unable to raise fresh resources and on other hand, the government which is always short of cash is unable to fund it for developing better infrastructure. While we seem to have 10 Billion Dollars to save one single Airline, we don’t have similar amounts to ensure that more infrastructure is developed by Railways which in turn will give a strong boost to the Economy and the hinterland in India as well.

 

One of the best ways to generate money is to dipose of the state owned Public Sector Enterprises. Most of them are on the way downhill with one after another going into loss. But if the same can be rid off and when I say sell, its not Sell to the Public via IPO at inflated prices – aka NMDC / NHPC among others but Sell in the way the NDA government did – total disinvestment. The amount so generated can be put to better use generating more employment via Infrastructural projects than supporting a couple of thousand staff (all of whom will not get retrenched either, the sale can have conditions for the same).

 

In my opinion, it would take the disinvestment of just 1 or 2 PSU’s to generate a sum of around 1 Lakh Crore per year. If this entire amount was given to Railways for putting into development of infrastructure, I can assure you that within the time that this government will end, the amount of infrastructure development by the Railways will match or even put into shame the amount of infrastructure development done during the last few decades.

 

All it needs is someone high enough to take the call and that person can be you. With Didi being in charge of Railways, I am sure she won’t object to the sale if it was promised that the entire amount will come to the Railways for use in developing new infrastruture.

 

So, can you take such a call?

Regards

 

An Aam Admi

 

PS: A real good report on Modal Split between Rail and Road Modes of Transport in India – Prosenjit Dey Chaudhury can be read here http://www.vikalpa.com/pdf/articles/2005/2005_jan_mar_17_33.pdf

 

 

Hello,

 

I am currently half way through the Book – Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed and its already making me scared. Scared not about the possibility that some day we may enter into another world war but scared that any financial implosion can have devastating consequences on a lot of people in India. People like my dad who after working for decades now is depend upon the bank interest that he gets for the deposits he has made.

 

Like most Indians, he is scared to stocks & has not much interest in investing in real estate which has meant that majority of his mearage savings are in the bank. Right now, he is literally happy to get as much as 10-11% interest on his deposits especially since they being invested in Public Sector banks, carry very little risk. While the bank risk of a bank defaulting & defrauding investors is not a worry I have (it has not happened in the last few decades) but am more worried about the Rupee loosing value to a extent that a default is not even scary.

 

As countries grow and money is continuously printed, the value of money does shrink. Without this, we will have no inflation and hence zero growth & in a way start getting into deflation. But on the other hand, too much of inflation too is pretty bad. On one hand, the value of the rupee keeps going down while prices move in the opposite direction. But interest rates have a limit & above a certain level, inflation can take a path of its own regardless of the underlying fundamentals.

 

For some time now, I have been bearish on the Indian Markets due to a variety of reasons including the continuing saga in Europe. But as I read this book, I realize the gravity of the problem that can crop up if things do not go as per the ECB plan. By removing the Prime Minister George Papandreou, Greece and hence the Euro may have gained some time, but I believe it’s just a matter of time before Greek either defaults or has to be supplanted with more money to ensure that it does not go under.

 

But Greece is the least of the problems, problems are spreading across the Euro Zone and it’s difficult if not outright impossible for the ECB to take evasive action & limit the domino effects that it can have. Interst rates are already rising for other European nations since the Greek episode has made investors wary of financing them cheap. Also the way the Greece situation is being resolved has meant that those who bought Insurance against such a scenario. New York times reports and I quote

 

“The deal to allow Greece to write off 50 percent of its debts to private investors without setting off credit default insurance protection has also left many investors feeling vulnerable”

 

This has meant that if similar procedure is followed in other countries, those long on the bonds despite having adequate hedge by way of Credit Default Insurance may still have to take a significant loss. Since this risk has to be considered & there is no protection, the only way is to ask for higher interest for the additional risk they are bearing.

 

Today,  Mohit Satyanand, a noted Economy / Fianance writer for Outlook Money tweeted that 10-year GOI bond yields crossed 9%. This is pretty high compared to historical standards but since our GDP is growing around the same levels, its atleast acceptable in a way for the time being. On the other hand, a country like Italy which had a GDP growth of 1.5% is now paying around 6.5% for a 1 Year Bond. This is way beyond it’s capacity and its a sure fire way towards disaster.

 

All this is happening despite ECB buying bonds of all the ailing countries as much as it can. The question that comes is how much more can they go and what next. The Interest that ECB is itself paying is going through the roof and it will have its implications. When they cannot sell any more bonds (demand is already down with today being one of the low days when they could just get to fill up the ask), the only option left will be to print notes and buy the bonds. This is what the US Fed did when it faced its Lehman moment and has in a way been continuing to do till now.

 

Unfortunately mindless printing of currency does have implications. Money so created has to go somewhere and the way it went before was to commodities / bullion resulting in strong rallies across the board. This has very strong negative implications for India since on one hand, we are faced with a slowing economy, a rising interest rate structure, a depreciating rupee and if commodities go through the roof, it has to be the final nail in our coffin.

 

RBI is near to exhausting all its mechanisms (normal ones) under which it could bring down the inflation rates without there being much destruction of long term growth. They have tried this despite reforms not initiated by the government which has been the single biggest reason for RBI’s failure to control inflation. Continuously raising interest rates can lead to either of the following 2 scenarios

 

1. Stagflation: Due to continuous rise in commodities (and this will naturally include food based items as well), we will have a strong inflation but growth will either stagnate or worse start to fall off.

 

2. Deflation: I doubt that with the kind of money floating around, we will face deflation any time soon. Deflation can happen if RBI raises interest rate to such an extent that growth goes into the negative sphere.

 

No matter which of the above 2 happens, we will be screwed, but the bigger problem is how our banks will cope with the problem and what effect it will have on the purchasing power of the Rupee. Honestly, I really have no idea what is the best way to preserve our capital since a fall from grace will affect every asset class across the barrier. The only difference will be what will come back & what will not.

 

The above view may look like a dire prediction and may not happen, but remember, Time and Tide wait for none.

 

Cheers 

 

Prashanth

 

 

Unless you are were too busy celebrating Deepawali to read the news on the Web or on TV, you would have known that finally after months of wrangling, the European Union has reached a agreement with the lenders of Greece wherein its been decided that the Investors will take a hit of 50% with the rest being taken care by the ECB.

Markets across Europe and US are up strongly at the moment. SGX Nifty seems to indicate a strong positive opening for our markets as well tomorrow (that is if US for some reason or the other doesn’t tumble overnight). So, the question is, Is the problem really over & if so what one should do next.

For the past several months, I have been bearish on the overall Indian Markets or a variety of reasons and one important reason was the European Crisis. I had emphasized that how the Greece situation is resolved will hold the key to how we will move forward and how we should position ourselves.

While the Indian Markets are still strongly bearish, over the last few weeks, markets seems to have bottomed out accompanied by huge bouts of volatility. A strong move can take us to the first strong resistance level of 5350 which also happens to be around the 200 day EMA for Nifty with any further rise providing us with a test of the 200 MA which lies around 5420 level.

The question is not whether we will break it. We may, we may not. The larger question to me is how do we position ourselves and what can happen next. Personally I am a trend trader & do not care about long term trend forecasting. But its important in my opinion to have a view on the long term path so as to ensure that we are rightly positioned in everything other than trading.

While the Greece issue being lets say put off for the time being, the focus will now shift to the other countries for whom borrowing from the markets have become pretty expensive – Italy for instance and how will they try to come out of it. But for those of us who trade the Indian Markets, I believe local issues will take the limelight for the time being.

Alongwith the hike in Interest rates, the RBI freed interest rate on savings account. This will have a strong impact on the balance sheets of every bank (other than a couple of banks like Yes Bank which have never targeted the retail segment very much). The impact will be felt more by the PSU Banks since they have enormous amounts available to them at the cheap rate of 4% and one which they can lend at much higher rates.

Even a 1 – 2% increase in rates (which will happen for certain) will have a very bit impact on the profitability of the banks and hence in a way should lead to Banks not joining the party (or rather not having the kind of party they had in 2010 for instance). This is infact already visible on the charts with Bank Nifty starting to underperform Nifty while Reliance which was a underperformer for more than 3 years now coming on its own finally.

I believe that while the market may get into the initial euphoria of the global boom, local realities should at some point provide a kind of resistance and then set stage to the return journey. The constant increase in interest rates are already having a impact, but much bigger impact will happen once its dribbles through the layers. Another big issue is the overshooting of the Government expenses resulting in greater borrowing. This can actually push up the interest rates still higher since Banks are always more comfortable providing loans to the government as against providing loans to business. 

One of the ways being explored (as I read from the papers) is that since there is no way to disinvest PSU ‘s, idea is to sell stakes held by the Government (when it saved the unit holders of US-64) of various companies so as to mop up the difference between the targeted disinvestment proceeds and actual proceeds.

The problem of Inflation too is not (again IMO) expected to come down anytime soon. Crude has remained stuck at high levels and since the government will be unable to lower fuel prices anytime soon. Minimum Support Prices are being hiked and this in turn will again have a impact on Food Inflation which is nearly stuck above the 10% level for month together now.  

After a pretty long time, India is facing problems with Labour as well. This has already impact Maruti and a couple of other companies and can if not solved by way of reforms spiral out of control. 

So finally, the important question. What to do now and what to buy. 

I believe that even in bear markets, there are always pockets of out performance. For example, despite the constant hike in Interest rates and how that would impact the Automotive sector, stocks like TVS and Tata Motors have done decently well for themselves. There are then counters like Gitanjali Gems & Hero Honda where looking at its charts, its difficult to believe that markets have been bearish for some time now.

But I would not be in a hurry to be a long term bull for the Indian Markets since there are various macro problems that remain unresolved and that should pull us back from any upmove coming as a result of removal of certain global uncertainties.

Prashanth

 

Today a major part of the business hub of Bangalore – the Chickpet / Balepet and other nearby areas were closed voluntary to show solidarity with the Anna Hazare campaign. Loosing business hurts everyone and if some one is doing it voluntarily, it shows the amount of pain the people have and the contempt for what is going on.

In the evening, I was listening to the speech of Anna Hazare and felt that as I had outlined earlier, while his goals were genuine and something that has to be accomplished, the route he is taking to get there is not the right way.

One of the key demands of the campaign is to include all levels of administration under the Jan Lok Pal. Of course this is a credible demand since much of the day to day corruption we witness is because of our interactions with the lower level of administrators than dealing with MP’s or MLA’s. But the problem is that the laws are such that it makes it impossible to get the work done without paying off.

For instance, let’s take the question of building a house. I would say that there would be less than 10% of total number of persons who have built their houses but haven’t needed to pay a bribe. The reason the vast majority are compelled to bribe is because the rules are highly impractical and illogical (in some cases).

The laws governing how you can build a house in your site were laid out years back. At that time, a 40 * 60 (feet) sites were allotted to Low Income Group. Set backs were framed to

1. Make it bit uniform in appearance

2. Give enough space for light and air.

But that was then when the land rates were pretty low and population was smaller. In the current age, with a growing population and growing needs, the cost of land has shot up substantially. But the laws remain the same despite sites getting smaller and smaller. Sites of dimensions of 15*20 (feet) are many in number. When one has paid through the nose for acquiring such small space, it defies logic to leave out so much of space to setbacks.

Architects when planning the building generally draw 2 plans. One is what will get approved and the second is what is actually constructed. The first observes every law that is demanded of and the second breaks virtually every law there is in the book.

Once the construction starts, the local AE, EE comes to visit since its now common knowledge that the building has violations (and that too in plenty). Depending on the amount of violations and amount of bargaining one can accomplish, a price is fixed and handed over which would mean that the guys will turn a blind eye to the said violations.

Now lets assume that there is a Jan Lok Pal and these guys are afraid, does that mean that every one will start obeying the law? On the contrary I feel that the asking price will go up since now its more risky than earlier. The guy who is building would not get him caught since he knows that he is violating the law in the first place and if he does get the guy caught, the guy coming next will ensure that the building never gets completed.

What instead would solve the problem is if laws are changed to reflect current situation. Agree that setbacks are needed to ensure Light and Air, but as the sites get smaller, it just is not possible to build anything. Why not change the law to reduce the said rules (including one that says that you cannot build a room over a Garage if the Garage is in the front of the property – not sure what logic is that, it defies conventional logic) and make it easy for people to build based on requirements and current trends.

If one looks at any new individual house, there would be violations galore. If 90% or more of the population is violating the law, then the answer would be to change the law rather than try to get everyone to follow the same. This may defy logic but will ensure that corruption comes down in some way.

I believe the same can be extended to a lot of areas where corruption is rampant because of unfollowable laws. 

As Gujarat Chief Minister says, the best way for the government is to ensure Minimum Government and Maximum Governance. Simplying the laws and making it upto date will reduce the reasons for some one to pay off to get the work done and hence have a tremendous impact on the society itself.

 

 

Consider the following scenario. By a quirk of fate, you are for a few moments sent to 2021 (1 Decade ahead). Being a finance person, your first instinct is to get a  Finance Almanac to take a look at Nifty as well as other asset class such as Gold / Rupee-Dollar / Real Estate. The idea is to know what asset class will work best so that when you are sent back to the present – 2011 you can invest in the best. 

But instead of the asset classes being higher than current, you see that all asset class prices have actually halved. This can happen either due to actual fall in asset prices or just inflation eating into the returns. Either way, lets assume that your almanac shows that Nifty is now at 3000, Gold is at 1250, Real Estate at 50% current price and Rupee-Dollar is 25 (vs. 45 today).

The big question then is, how do we grow our networth if there is no growth in any of the asset classes that we usually use to invest. This is of course a very hypothetical question, but not something un-imaginable. Just ask Japan. Nikkei came all the way down from 38K to 7.5K, Gold in terms of Yen went down since Yen appreciated strongly while Gold (International) itself did not move much (except for recent couple of years), USD/Yen went from 278.31 in November 1981 to 79.75 in April 1995. In other words, for the Japanese, every investment since 1980 has turned out to be far worse than anything imagined.

One of the way out is to invest in Fixed Deposits, but remember, there is no guarantee that there will be high interest rates either. Japan for instance has been at Zero for a very long time and still the economy has not grown. Its a sort of a double-dhamaka but one that has the worst possible outcome.   

Whether India will suffer a similar fate is tough to answer at the current juncture. In my opinion, 2003 – 2008 can be termed as the lost half decade. We lost the opportunity to move higher because we felt that it was our god given right to grow at 9 and dream of 10. Now the pain will come to bite us and the only question that remains is, how strong is the bite.

Having said all this, I still do not believe that we have topped out. I feel that we may actually be at the stage that Dow was during the 70’s, see-sawing though the decade before one of the biggest bull runs got unleashed in the 80’s. The idea of this post is more of a effort at loud thinking at how we should allocate our resources should things go bad from here.

Cheers

Prashanth

In a sudden and dramatic move, one of the Top 3 rating agency, Standard & Poor downgraded the US from AAA to AA+. This at a time when the other two rating agencies, Moody and Fitch, had for the time being re-affirmed the AAA rating.

While theoretically this downgrae seems to be out of the blue, the fact that US markets were being pounded with the worst fall happening on Thursday with basically very little news to cause that kind of fall (other than technicals, since technically every system would have been on a Short mode well before Thursday), the downgrade is seen to have been known to atleast a few or had been anticipated by some which was the reason they were keen to exit at any price.

Since the downgrade has come after the US markets closed and with the weekend kicking in, even the futures market being shut, we can come to know of the consequences of this only on Monday morning. 

Theoretically while a downgrade hurts, in the practical sense, it isn’t that this is a kind of Satyam where everyone thought it was something else but turned out to be some thing far worse. In a way, most persons in the market knew that the US is in trouble but the fact that US is in trouble in itself doesn’t lend to making any strikingly different reasoning since with every one knowing that its bad, the market would in time would have discounted that event / matter.

So, how does this downgrade hit us is the key question that has to be answered and honestly its still too early to make a suggestion of either this being the start of a run down or it turning out to be just another hiccup. Personally I have been bearish about India in the longer term due to a variety of fundamental reasons which I incidentally was posting over the last few days on my twitter stream. 

I believe that Nifty is headed much worse than what we are currently if things go according to what I have visualized. One of the key challenges / problems for India in my opinion is that we are overdependent on IT exports. IT has been in my opinion the key driver of the economy with the benefits of it getting spilled over to other sectors as well. Take IT out of the equation by even a bit and all hell will break loose.

The reason I see a negative in IT exports is simple. The US dollar will react to this event by (in theory) depreciating against other currencies. One of the biggest edge for IT in India has been the weak rupee. If that starts to become stronger, it will erode the margins for IT companies forcing many IT projects to be taken back to the US. After all, its not that there aren’t enough IT guys in US, its just that they were unable to compete with India (and with China in the manufacturing sector) precisely because of our weak rupee.

There is a story that we are taught in our early school years – The Ants and the Grasshopper. Our government has behaved like the Grasshopper by not using the good times to build infrastructure that can last the bad times. Instead it (even now) is coming up with harebrained schemes to further expand the deficit. 

Just like the Fed has shot all its silver bullets well before this happened, so has  the Indian government here. It literally has not much of a option if Tax revenue starts to slide down. With Interest rates already high, more borrowing by the government will push it up further higher making it tough for even ordinary business to survive. Since costs will have to be pushed to the final consumer, this can have a vicious impact on inflation.

Some of this may be negated by the cheaper imports of fuel (can happen if either Rupee Appreciates or Crude prices crash worldwide) but since much of the inflation is more due to supply constraints than demand, I feel that this alone cannot soften the blow. 

While there has been great amount of talk on blood spilled on the street (market parlance to stocks bottoming out), to me, the blood spilling is yet to happen. 

 For example, if you take the CNX S&P 500 stocks, out of the 500, 337stocks still trade above the 200 day EMA. If one looks the same ratio in February / Mach of 2008, it was around the same. People who bought there too lost and maybe lost more since with the market already having fallen, many would have taken a chance to buy more than they normally buy.

For the Indian markets, I believe that a test of 4800 is a possibility that is very much higher. 4800 is not just a horizontal support line but also is the current weekly 200 day EMA. But as I said above, it depends on a lot of factors which we will know in the days to come.

Happy Trading

 

Prashanth