Portfolio Yoga

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

Have you ever wondered how in all your life, you are doing only one thing – catching up? It’s as if we are forever chasing dreams and aspirations that we may not really desire but have been hard wired due to the amount of hope and aspiration that has been filled in by our near and dear ones.

Just think back, what was the last major decision you took that seemed out of line for the normal world? A decision that was based on just your choice than the choices made by some one else and which you are following blindly.

Our first steps at catching up are implanted in our brains by our parents. Early in school we are constantly encouraged to score high marks just because the neighbor’s son chintu has scored them and why should you be any different. This at a time when you actually do not believe in anything but want to spend your time doing what interests you.

By the time we hit the pre-teens, the implantation of idea is nearly complete. Now we no longer need the goading of our parents to try and beat chintu, we feel determined that we need to come on top never mind if that means sacrificing what we love doing most.

There are girls who have excelled in Music / Dance leaving it all together by the time they reach the X std or XII std since they now seriously believe that Music and Dance are more of a hindrance to their goal of becoming a Doctor or Engineer. And why a Doctor or a Engineer, well that is because it’s not their goal but something that every other friend of her aspires for and hence should be her aspiration too.

While the family members applaud the child in the early years when she starts to learn music / dance and yearns for her to show the same when guests arrive, they are the first to berate the same person in case, horror of horrors, the same child now wants to achieve something big in the are of her liking, Music for instance. It’s good as long as it co-habits with the other aims, but once it becomes her main goal, counseling starts to try and wean away from her choice to the choice others have made and which she too should make.

Once the person gets into Engineering, there starts the next race, the rat race which will take hold for the next couple of decades if not more of the person. The idea as usual is to first score good marks so that you can get a great paying job and nowadays that means getting into software engineering even if one has chosen mechanical engineering as his subject and once into a job try and get promotions every other year so that you can make more money than that friend of yours who you despise.

The goal post has now completely shifted from what you wanted to become to what the market wants you to become. Even without knowing, you have chosen a path that you feel you were always destined for but one which is nothing more than a hard wiring that has taken place from your birth.

In my own personal experience, the above catching up is true for most of my friends, say a ratio of 8 / 10. The question is, are you still catching up?