Can Carry Trade Make Real Wealth

• Carry trade strategy : buying (investing in) a high interest yielding currency and selling (borrowing) a low yielding currency
• Yen is favoured funding currency for the carry trade due to low interest rates in Japan
• Dollar has become the next favoured one due to the economic crisis and near-zero rates in America
• In an effecient market, carry trades are profitable as the extra interest earned is offset by the fall in the target currency
• Hence, high-interest currencies trade at a discount to their current or “spot” rate in forward markets
• If exchange rates today were the same as those in forward contracts, there would be an opportunity for riskless profit
• In practice, the forward market is a poor forecaster
• Most of the time exchange rates do not adjust to offset the extra yield being targeted in carry trades
• Carry trades are prone to infrequent but huge losses
• As per a study by Òscar Jordà and Alan Taylor of the University of California, Davis, a refined carry-trade strategy produces more consistent profits and is less prone to huge losses than one that targets the highest yield
• In their study, they found that the following three things influenced the currency movements in short term

o change in the exchange rate over the previous month

o size of the interest-rate gap between each currency

o size of inflation gap between each currency

• These impulses can drive exchange rates a long way from their fair or “equilibrium” values leading to losses
• To guard against this, the authors added to their model a measure of how far the exchange rate has shifted from its fair value
• Modifications were made to the model to reflect non-linear link between profits and yield and the likelihood of a crash escalating with a currency becoming dearer
• The trade, based on the model, might well turn out to be profitable but the forgone profit is a small price to pay for avoiding a potentially big loss
• However, the authors stress that their approach was better than the simple one at predicting the direction of exchange rates

Partly Correct-Partly Incorrect

In one of my earlier posts titled “Sell equity and Base Metals” I had said that Euro is reaching a crucial level of around 1.5 and is expected to correct from here, leading to a correction in Gold prices, Crude, other metallic commodities and equities.

What has happened that the dollar has gained considerable strength form there trading at a levels of around 1.46, gold has corrected to almost $1120 and crude along with other metals have also plummeted quite significantly. However, the only thing that did not go as I said was the Indian equity markets.

At the time when most of the commodities, oil and the global financial markets were falling, the Indian Nifty index stood all up just giving some sideways movement. This indeed was very surprising for, since this whole rally was because of a weaker dollar and was expected that with dollar gaining strength, the rally will fade away. However, this belief was put completely wrong by the market.

This could mean two things

• First and the one which everybody on TV is shouting is that the Indian markets have decoupled and now we are in a bull market of our own and India does not need to follow the global clues too stringently
• The other could be, which I am very fearful of is that on one fine day we may fall like the day we did in January last year. This was exactly the case to the two weeks leading to 21^st January 2008. On one hand all the global markets were correcting, while on the other the Sensex was scaling new heights everyday and then on 21^st fell by over 1000+ points on a single day

I strongly believe that one should remain very cautious now until the Nifty breaks pass the strong 5200 levels and only initiate a long position then. This is because a falling oil and commodity prices seriously hurts the bottom line of almost 45% of Nifty 50 companies. Moreover, what is going on since years could not change over one week and hence the question of decoupling does not arise.

If a falling Dubai can create vibrations in Indian stock market, a rising dollar has the power to cause an earthquake

Thus, currently the best trading strategy would be to go short with a stop loss of around 5200 Nifty.

October IIP Update

• The IIP figure for October stood at 10.3%, disappointing everybody since the expected figure was hovering around 12%.The same index registered a growth of -0.4% y-o-y in Oct’08 whereas a growth of 9.6% (revised) y-o-y in the last month

• The figure was below the market expectations, leading to a fall of 50.41 points in the Sensex, pulling it down from 17,189.31 to 17,138.90, just after the release of the data. Since the market was expecting a better number, all the gaining sectors lost their momentum and took a back step

• The figure will also help RBI for the interest-rate decision for January. But, the figures are still not bad for they have again hit a double-digit growth for the second time in three months. Acc. To Montek Singh Ahluwalia.the figure is strong enough to indicate that India’s IIP is still in good shape and the trend will continue in future

• The manufacturing sector grew by 11.1% y-o-y compared to -1.2% in Oct’08 y-o-y on account of increased manufacturing activities. This sector has seen a major correction in its numbers. The electricity sector increased to 4.7% from 4.4% in Oct’08 y-o-y. Manufacturing and electricity sectors both grew by 9.3% & 7.9% respectively in Sep’09

• The mining sector, posted a growth of 8.2% against 2.8% in the same month of the last year. It grew by 8.6% in Sep’09 y-o-y respectively. It has been consistently showing good performance since the last 3-4 months

• In the use-based category the basic goods, capital goods and the intermediate goods sector registered a growth of 5.0%, 12.2% and 14.3% y-o-y respectively compared to 2.7%, 3.1% and -3.7% y-o-y respectively in Oct’08. All the three sectors have performed extremely well: especially the capital goods segment which posted negative figures for around 3-4 months starting from March

• The consumer goods sector has grown by a satisfactory 11.8% y-o-y compared to its growth of -2.3% in Oct’08 y-o-y. The sector’s growth got injected by a boost in the consumer durables segment which grew by 21.0% y-o-y, a huge increase from -3.0% in Oct’08 y-o-y. Even the consumer non-durable goods performed stupendously registering a growth of 8.1% compared to a growth of -2.0% in Oct’08. It has been performing meagerly since last 4-5 months, registering low growth figures since last few months and even negative at times

• The IIP figure for October stood at 10.3%, disappointing everybody since the expected figure was hovering around 12%.The same index registered a growth of -0.4% y-o-y in Oct’08 whereas a growth of 9.6% (revised) y-o-y in the last month

• The figure was below the market expectations, leading to a fall of 50.41 points in the Sensex, pulling it down from 17,189.31 to 17,138.90, just after the release of the data. Since the market was expecting a better number, all the gaining sectors lost their momentum and took a back step

• The figure will also help RBI for the interest-rate decision for January. But, the figures are still not bad for they have again hit a double-digit growth for the second time in three months. Acc. To Montek Singh Ahluwalia.the figure is strong enough to indicate that India’s IIP is still in good shape and the trend will continue in future

• The manufacturing sector grew by 11.1% y-o-y compared to -1.2% in Oct’08 y-o-y on account of increased manufacturing activities. This sector has seen a major correction in its numbers. The electricity sector increased to 4.7% from 4.4% in Oct’08 y-o-y. Manufacturing and electricity sectors both grew by 9.3% & 7.9% respectively in Sep’09

• The mining sector, posted a growth of 8.2% against 2.8% in the same month of the last year. It grew by 8.6% in Sep’09 y-o-y respectively. It has been consistently showing good performance since the last 3-4 months

• In the use-based category the basic goods, capital goods and the intermediate goods sector registered a growth of 5.0%, 12.2% and 14.3% y-o-y respectively compared to 2.7%, 3.1% and -3.7% y-o-y respectively in Oct’08. All the three sectors have performed extremely well: especially the capital goods segment which posted negative figures for around 3-4 months starting from March

• The consumer goods sector has grown by a satisfactory 11.8% y-o-y compared to its growth of -2.3% in Oct’08 y-o-y. The sector’s growth got injected by a boost in the consumer durables segment which grew by 21.0% y-o-y, a huge increase from -3.0% in Oct’08 y-o-y. Even the consumer non-durable goods performed stupendously registering a growth of 8.1% compared to a growth of -2.0% in Oct’08. It has been performing meagerly since last 4-5 months, registering low growth figures since last few months and even negative at times

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Dubai's Debacle and India..

I was on vacation for a week and all of a sudden amidst the desert of Jaisalmer saw Indian markets crashing like anything. Called up one of my colleagues in Kolkata and he told that the sell of today is because some kind of a debt default by a company from Dubai (another desert place).

The first thing that came to my mind, is since when the global markets have started following DUBAI..!! But when I came back and read some news articles and reports by eminent houses like CLSA and Citi group, the sell off really made sense.. at least for India, if not for the rest of the world. This is mainly because:

• Indian are ~40% of UAE’s population; forming ~10-12% of India’s inward remittances. Thus a debacle in UAE could really hurt remittances into India and also increase unemployment
• UAE forms ~8% of India’s non-oil exports
• DP World operates five container terminals in India, accounting for 40% of India’s container traffic
• A lot of JVs between Indian and Dubai based firms are operational in Indian Real estate domain (Emmar- MGF, DLF-Limitless, etc) and this could severely impact real estate prices in India
• Good for India, Indian banks does not have any materialistic loan exposure to companies in Dubai

What exactly happened is that Dubai’s failure re-awakened a number of dormant fears in investors that the worst probably is over,but the things are definitely back to 100% normal. Dubai which was potraying itself as a gateway to the financial world has being held in a sandstrom it has created on its own.

Thus in the coming few days, it would be good to remain cautious on the global capital market recovery and the best strategy is to go short with a stop loss of around 5200 on Nifty Index on a closing basis. Because the way media has waved off this Dubai Debacle in a day or two is actually a cause of concern since the crisis looks bigger than it is being portrayed as.

Sell Equities & Base Metals

On October 20th 2009 Bloomberg reported a news snippet saying that " European finance officials are concerned the Euro’s climb to a 14-month high against the dollar is eroding exports”.

The same day French President Nicolas Sarkozy called the move a “disaster” for the economy.

Since February Euro has gained almost 20 percent against the dollar making the Euro zone’s exports more expensive to overseas buyers and threatening the economic recovery from the worst recession since World War II.

Sarkozy’s counselor, Henri Guaino, said that the U.S. is “flooding the world” with dollars and that the currency’s weakness may become “unbearable.” An exchange rate of $1.50 per euro “is a disaster for the European economy and manufacturing sector.

Treasury Secretary Timothy Geithner said on Oct. 3 that it is “very important” for the U.S. to have a strong dollar the reason being US is primarily an importing country and a further weakening of dollar could lead to significantly high levels of current account deficits

In view of this, I strongly believe that the European Central Bank would take every possible step to ensure that its currency does not appreciate further.

Couple of weeks back when Euro was near 1.5, Nifty index was around 5200 and other major global indices was also at their peak. Then what happened was the Nifty corrected to 4500 levels and other global indices also had the same fate. This however was accompanied by Euro reaching almost 1.47 levels unnoticed.

The relation is that, if Euro weakens form here, that means dollar will gain strength and with dollar gaining strength comes the correction in all major base metals and crude. Moreover, in almost all the top world indices, whether Dow Jones or Nikkei or Nikkei, the weight of commodity driven stocks is the maximum. Thus a correction in global commodities because of a weakening euro will inevitably lead to a correction in the global equity markets.

Again since a correction did take place some time back, there is a strong possibility that it shall repeat itself, given the fact that Euro is nearing 1.5.

Hence, I believe the trading strategy one could adopt currently is to go short on the Nifty Index, base metals, crude and commodity driven stocks like Crain India, Reliance Industries, Hindalco, Tata Steel, Sesa Goa, Sterlite, etc. The stop loss one should keep is a Euro level of above 1.51.

Steel Sector – Results Update

The recent recovery in industrial growth and in the real estate sector augurs well for Indian steel makers and the resultant rise in demand is already evident. India and China are two markets where steel units are operating at quite high levels of capacity utilization; 86% for China and 80% for India, compared with the world average of 64%.

• The four major steel companies came with their Q2FY10 results in October 2009. Tata Steel Ltd., India’s biggest producer, reported a nearly 50.0% slide in profit and state-run Steel Authority of India Ltd. posted a 17.0% decline in net income last quarter. Net profit of Jindal Steel &Power Ltd. And JSW Steel Ltd. improved by 7.5% and 42.2%, respectively

• Most companies benefited by selling more of their products as demand picked up because of the stimulus package and lower raw material prices but it did not translate into higher revenues and profits due to poor prices

• Indian steel prices fell almost 35.0% from a year earlier, trimming earnings at local steelmakers.

• Steel exports during the period declined by 40% to 0.93 million tonne as the global economy continues falters

• The steel companies have reduced the price of flat steel products on account of global weakening of prices and appreciation of the rupee, as well as a dip in Chinese domestic prices

• The margins have also contracted mainly on account of lower realizations and higher raw material prices

•I believe that the Steel Stocks have gone way above their fundamentals and most of the demand recovery and other such factors are already factored into their prices. Thus entering them at the current levels would be taking on significantly higher risk and so one should wait for at least 2 more quarters to see whether or not fundamentals improve and then enter

Telecom Sector Result Update

The three major Telecom Sector Operators Bharti Airtel , Reliance Communications & Idea Cellular came out with their Q2FY10 results in October 2009. The Key Highlights were:

• While Bharti Airtel & Idea cellular came out with results around analysts expectations Reliance Communications posted figures which were way below street expectations

• The companies witnessed muted growth on top line front with sales not growing as analysts expected. This was due to less than expected growth in subscribers and with a decline in ARPU’s and MOU’s over the last five quarters

• Among the key revenue segments Wireless services registered a less than expected increase with Passive Infrastructure(towers) business registering a healthy increase The companies witnessed muted growth in EBITDA margins but PAT margins registered a healthy increase mainly on account of cost cutting and decreasing interest costs

• The current outlook of the telecom operators looks bleak considering growth which was a major factor for the valuations which the companies used to command is bottoming out because we are witnessing teledensity of more than 100% in the major metros which are major revenue drivers, intensifying competition because of entry of new players like MTS, Tata DOCOMO and with companies like Uninor, Swan, Loop due to start operations existing operators do have to slug it out to fight competition of falling call rates and subscriber churn

• Increasing competition and muted growth has made telecommunication a matured play and with the rural market being a low margin segment the rural growth story will not command higher valuations and with new services like 3G and Wimax being delayed due to regulatory hurdles the present outlook for the industry doesn’t looks favorable and with Mobile Number Portability (MNP) due to come there would be a churn in subscriber base making it all the more difficult for the existing players

• Our analysis concludes that declining sources of revenue, a declining trend witnessed in ARPU’s and MOU’S, saturation of urban customer base, increasing competition and regulatory hurdles makes telecom an unfavorable play to be in at the moment and until there is a clear picture on revenue front which would come out after 3G auctions and with the regulatory hurdles sorted out any valuations made for these companies would be unjustified so we would suggest staying away from this sector even though all major players have seen their stock price tumbling by 30-50% and with most of the damage already being discounted

• We strongly believe that Bharti Airtel is the only stock in the sector which is to some extent suited to investmentand one can add the stock to their portfolio since it would benefit with entry into the 3G spectrum (largest 2G subscriber base) and value unlocking from Bharti Infratel and Indus Towers

For More details and analysis of Individual companies result, please use the following link to download the report

Telecom Sector Result Update.

Happy Investing..

Brokerage Sector Result Update

India Infoline, Motilal Oswal & Geojit BNPPARIBAS, the three major brokerage under our coverage universe have come up with their Q2FY10 results

• All three have delivered results which are better than the street expectations
• The companies scored on top line front mainly on account of increased revenue realization from equity and commodity brokerage segments while segments such as Mutual Fund advisory and Wealth management also registered healthy increase.
• The companies witnessed significant growth in margins mainly on account of an increased customer base, increased participation from the retail investor segment and an overall positive breadth on the market front also added to the cause
• The recent credit policy aimed at tackling inflation will have an impact on the revenues of the companies because reduced participation on the retail front and with the markets heading back to positions which we would term as expensive considering the valuation parameters a wait and hold approach from investors could dampen revenues
• However considering the fact that the companies are regularly innovating their product portfolio and with an ever increasing demand for professional money managers the industry sure has a bright future

Moreover I believe that with SEBI giving clearance for the extension of timings of equity market, would lead to higher revenues by the brokerage houses and thus we retain our earlier BUY call on each of the three stocks.

One could start doing SIP in these three stocks with equal weights for good long term investment returns.

You could also read our Result Update report on the same by using the following link

Credit Policy Analysis

RBI announced its Credit Policy on Tuesday and the market reaction to it was in line with my expectations mentioned in the post titled "Credit Policy Eve".

Despite the fact that most of the key rates policy rates remained unchanged as expect, the benchmark indices corrected by around 2% with the banking and real estate sectors plummeting the most. This is mainly because of the fact that the policy sets a tone for the beginning of the reversal of Monetary Easing.

Please use the following link to download our group's report which would highlight some of the key aspects of the credit policy and why I believe that markets will correct further from here.

http://www.scribd.com/doc/21784924/KBSL-Credit-Policy-Analysis

Happy Investing

Credit Policy Eve

The Reserve Bank of India today released its review of the macroeconomic and monetary developments which serves as a background to the Second Quarter review of Monetary Policy 2009-10 being announced tomorrow, October 27^th, 2009.

Some of the Key Highlights of the documents which we believe will set the tone of the monetary policy are:

· Global economy has started exhibiting tentative signs of recovery, but the recovery is, however, widely perceived to remain slow and gradual, with receding but significant downside risks

· The first quarter GDP growth in 2009-10 still points to persistence of slowdown

· Information available on various lead indicators in the second quarter of 2009-10 suggests that because of deficient monsoon, kharif output may be adversely affected

· Deceleration in aggregate demand that was witnessed in the second half of 2008-09 continued during 2009-10. Growth in private consumption demand fell to as low as 1.6 per cent in the first quarter of 2009-10. Investment demand also decelerated further, and the high growth in government consumption demand that was witnessed in the last two quarters of 2008-09 moderated.

· Deficient monsoon and the associated drought like conditions in several parts of the country, and the more recent floods in some other parts, could also dampen rural demand

· External demand continues to be weak. Trade data show that during April-August 2009, merchandise exports and imports declined by 31.0 per cent and 33.4 per cent, respectively, over the corresponding period of the previous yea

· The liquidity conditions remained in surplus on a sustained basis, which was absorbed by the Reserve Bank through reverse repo operations under the Liquidity Adjustment Facility (LAF) and the over night rates hovered around LAF signaling ample liquidity into the system

· The changing inflation environment, however, is being driven by strong escalation in prices of food articles, which have increased by 14.4 per cent (year-on-year) so far. Excluding food items, the WPI inflation remains negative at (-) 3.4 per cent.

· From the stand point of monetary policy, anchoring inflation expectations in the face of sustained high inflation in essential commodities will be a key challenge

· The Reserve Bank’s professional forecasters survey points to downward revision to the growth outlook from 6.5 per cent to 6.0 per cent in 2009-10.

· Emerging inflationary pressures may also persist and escalate further on account of the fading away of the base effect, cost push pressures through wage-price revisions in the face of elevated CPI inflation, challenges in improving the supply situation of essential commodities in the short-run, gradual pressure on global commodity prices along with global recovery, and rising inflation expectations on account of elevated CPI inflation.

· The overall economic outlook is, therefore, a mixture of upside prospects of recovery and downside risks. Managing the trade-off between supporting growth and reining in inflation expectations poses a complex policy challenge.

Kredent Analysis:

The tradeoff will be costly since the capital markets are moving way beyond the real economy. However, we do not expect a rate hike in the second quarter monetary policy review due to a bleak growth outlook, however the tone in which inflation is presented in this press release by the RBI clearly sets a prelude for a rate hike in the third quarter policy review or even before that.

The way Nifty has behaved over the last 4 trading sessions clearly suggests that markets are factoring in a change in RBI’s stance. Thus we strongly believe that its time in the market to start booking profits and move away from the rate sensitive like banking, infrastructure and real estate and move towards defensives.

Sugar Stock Prices Could Correct...

Brazil this week imposed a 2 percent tax on foreigners’ purchases of stocks and stocks to curb the appreciation of its currency. This is because the Brazilian currency has appreciated by around 33% the dollar this year, the best performer among the 16 most-actively traded currencies tracked by Bloomberg.

This was in fact hurting the Brazilian economy, since a major portion of its income depends on export of Sugar and other related products. Thus in a move to protect its exporters the government took this decision. This also lead to a 3.4% fall in the Brazilian Bovespa Index tumbling by around 3%, the most since March.

I believe that this move could also lead to a correction in the Global sugar prices, because it will lead to a slowdown of fund flow in Brazil. Thus, at the current levels it makes sense to go short on the Indian Sugar stocks, which have already risen by a handsome amount (YTD), because if sugar prices will correct, its inevitable for the stocks to follow the same trend.

Moreover, most of the leading brokerage houses in India has come up with fresh buy calls on the Indian sugar stocks, despite their already escalated levels and which I believe could be the sugar sector entering into the distribution phase of this bubble.

Hence, one can go short on the sector with a trading view, but definitely with a stop loss.

Stronger Yuan... A Necessity

The basic idea I want to say through this post is that if China's economic growth has decoupled from that of America's, then it also need to decouple its monetary policy if it wants to stop the Chinese economy bursting like any previous economic bubble.

What has happened over the years that in order to support its exports the Chinese government has kept the yuan stable against the dollar or one could say that it has tied its monetary policy to US. So far it has mattered a little. But due to the current domestic deflation has lead to Chinese real interest rates to be among the highest of any big economy. But this monetary coupling will become increasingly dangerous.

America’s weak economy means its monetary conditions are likely to stay ultra-loose for far longer than it makes sense for China. Left in place too long, the currency alignment could swell an asset bubble.

Thus to re balance Yuan becomes a strong necessity if China wants to avert an asset bubble. This transition as Economist says "Will not be easy. The spectre of a stronger yuan will, temporarily at least, worsen China’s asset-price bubbliness, as foreign capital floods into the country in anticipation of a stronger currency" But still this calls for acting quickly and carefully rather than doing nothing.

The longer China continues to keep the Yuan at the current level, the bigger the distortions and the risks from any currency adjustment. Without an independent monetary policy China will eventually become a bubble economy. To avoid that fate, Beijing must let go of the yuan, so that it can raise interest rates to wipe out some of the access liquidity.

Happy Diwali...!!!

Branded Retail Sector

I often wonder why do people pay so much premium price to acquire Adidas or Nike shoes or an Apple iPod. Its just because the brand speaks for itself. People pay a premium to acquire that brand and the companies on the other hand make good money for themselves and their shareholders.

In our firms latest stock recommendations, we stand bullish on the Indian Branded retail Sector. We believe given the size of Indian consumption basket and ever growing middle class the sector offers immense potential for long term investments.

Also given the fact that in the last six-seven months the Nifty index has moved way beyond the real economic activities its time not to go for stocks which everyone is very bullish on cause their valuations are already at extreme levels.

In multi brand retail segment is plagued with problems like inventory management, high debt, and competition. However in the branded retail segment the companies like Provogue, Zodiac, Killer and Koutons have established a niche for themselves in terms of a brand value and is definitely poised to gain out of the changing preference of the Indian middle class.

Please use the link to download our latest report on the same.

http://www.scribd.com/doc/21038240

Happy Investing.

Sailing the Way

This ongoing stock market rally has completely baffleed me. There isn't any fundamental reason for market to move the way currently it is and so I was bearish since 4700 Nifty and have being proven completely wrong.

All the asset classes are rallying in a way it has never happened before. Gold prices are rising because US dollar is loosing its strength against Euro and this is happening because people believe that the excess liquidity infused will definitely lead to inflation in coming months and so a weakening dollar and the demand for gold is increasing as a hedge against inflation.

But text book fundamental says that if people anticipate inflation then the treasury yields should increase and gold should rise and equity should fall. The former two is happening but only GOD knows why the equity is not correcting. If the theory is correct and the same things have happened in the past, it should happen in the present also. Inflation expectations and equities can not rally together.

As the market direction is not clear I would not comment more on that. However I believe that stocks or sectors which have not joined the current rally should definitely perform. One such stock is Great Eastern Shipping.

The company is India’s largest private sector shipping company with excellent fundamentals. The stock despite having high ROE, ROCE and margins compared to its peers is only trading at a P/E of around 3.5 and only 0.8 times its book value. It has a good dividend paying track record and currently the dividend yield is around 3%. The sector has immense potential since with the the recent surge in the global economic activity, followed by the rise in the India’s industrial production index could lead to a higher demand for the shipping activity.

I strongly believe that this is a value pick and should be added on the dips for an investment horizon of around 1.5-2 years.

Please use the link below to access our group's recent report on GE Shipping.


http://www.scribd.com/doc/19964042/KBSL-GE-Shipping

Too many Expectations = DISSAPPOINTMENT

"Disappointment is a sort of bankruptcy -- the bankruptcy of a soul that expends too much in hope and expectation. " The quote by Eric Hoffer clearly sumps up the recent disappointment of Indian investors after the larger than life IPOs.

The Valuations at which the companies like NHPC and Adani were offered to the investors were completely sky rocketing, still the way these issues were over subscribed was completely amusing. The power sector story was sold as if the GOD himself is a merchant banker and when he is underwriting an issue, d investors are bound to gain since god would always want to do charity.

But the reality is that the promoters have squeezed all the juice out of the IPO and what was left for the investors on the table was just an empty pot. Selling an hydel power generating company at 36 times its trailing earnings is absolutely crazy. The kind of risks associated with an hydel power generating company were never discussed even in media before the issue. Because of the current drought like scenario most of the hydel power plants in the country are operating at around 50% of their capacity and the chances are that some or most of them could also be shut if the situation continues. There are risks of landslides or similar natural disasters in the area where these companies have build plants.

Adani Power's valuation was justified that it would generate around 9000+ MW of power by 2012 and so its really a cheap one. The same story was weaved around Reliance Power some 2 years ago with numbers like 33000+ MW and today the company after 2 years is not generating even a single MW and the stock has almost more than halved from its issue price. Even if one plant of Adani does not reaches closure as per the stated time or does not get the fuel supply, the kind of interest cost the company has to bear is way too much.

Thus, I believe that people specially retailers who have applied for these IPOs can seriously exit before any sort of damage happens. These stocks, based on valuations I believe will be available at lower levels in near terms and then one should enter them for a long term investment horizon. Probably 70-75 for Adani and around 25 for NHPC makes much more sense rather than holding them currently.

But one more thing that amuses me is that one buys in an IPO with good long term investment rather than with an intent of selling on listing and so the disappointment is inevitable since those crazy days of 2007 are no more there.

I believe the forthcoming Oil India IPO will also see the same fate and one should avoid that because even at the lower end of the price band company is expensive than ONGC.

Moreover the markets are likely to remain on a positive note before the Oil India Issue closes since, this will help company issue the stock at the upper end of the stock band.

Happy Investing

Bull or Bear...?

On Friday after a long time the Nifty has given a closing above the important level of 4720 and as per Mr. Mukherjee (CNBC) this could very well mean that we are heading towards the magical 5000 levels and are in fact in a multi year bull market.

I was also doing my bits of research to check whether or not this is possible or not. Came across a nice article by one of my colleagues which very well articulates my thoughts on where are the markets heading. Thought of sharing with you people. Here is what it says...

We are in strong uptrend from last 7 days.Strangely, it was more due to the buying of domestic financial institutions. On some of the 7straight up days, the FIIs were net sellers.

The forthcoming PSU divestments - particularly, the Oil India IPO ata large premium - is the probable cause of the domestic institutions propping up the market.If that surmise proves correct, then the Nifty could move higher during the next couple of weeks till the IPO gets over.However there are couple of concerns in my mind regarding Nifty.

Firstly,we are trading at PE of 21+ as per attached chart below.Historically we have corrected from 22 zone except euphoric years like 2000/2007(dot com boom and credit boom) .From the current situation there could be two outcomes -Either market corrects 20-25%which will take valuations back to historical averages or bulls gain full control and valuations enter a bubble zone.However for the latter, bulls need help from India Inc besides the purchasing power(liquidity) .Earnings growth of Indian companies need to pick up fast or else valuations will keep getting dearer pushing markets nearer to bubble zone.There has been rush of fund raising by companies recently mostly in the form of equity .This will lead to equity dilution and further depress EPS.

Secondly Nifty is very near the 61.8% Fibonacci retracement level from January top of 2008 to October low of 2008.The retracement level comes at 4800.Even though nifty has broken the earlier resistance of4725-4730 and has made a new 2009 high on Friday, one needs to be cautious at this juncture.

Thirdly, an observation on the Sensex chart is also a cause of concern. The distance between the 50 day EMA and the 200 day EMA, is close to 2000 points. On prior occasions, such a distance between the medium and long-term moving averages have led to severe corrections or even trend reversals. In the 5 years closing chart of the BSE Sensex index attached below, note the bull market corrections in 2006 and 2007, when the 50 day EMA deviated too far from the 200 day EMA. In 2008 and 2009, the deviations were bigger which led to trend reversals.

Can the pattern repeat ?.It may repeat in next couple of weeks after the Oil India IPO .One needs to avoid new investments now until Nifty and Sensex take a clear direction. Rather than betting on the Nifty or on speculative stocks one should invest in sectors that have strong long term growth potentials. Likes of Media, Pharma, Power Ancillaries and Brokerage sectors I believe are good for long term investments and could provide substantial return.

Will be soon posting some of the reports by our firm on the mentioned sectors.

Till Then Happy Investing

From Swine Flu to Chine Flu...

Over the past few weeks the most haunting fear that the world is facing is the outbreak of swine flu and there were fears that this could lead to a slowdown in cross border business and financial activities and thus the fall in the global markets.



Though the fear concerns are justified to some extent, however this fear is far less a threat to the global financial system than the much talked about Chinese bubble. Many people are just taking this very casually, but this current Chinese bubble is of a very serious concern. The kind of overcapacity China has build up over the past few years is way too much.

• Annual Steel production capacity of 660 million tons far exceeding estimated demand of 470 million tons. China will produce a record 580 million tons of prime steel in 2009, far above the government's target of 460 million tons. Chinese government will freeze the approval for new steel projects for the next three years. The amount of steel China has consumed over the last 5-6 years is more than the total steel India has ever consumed and also more than the amount US has consumed during its own development stage


• The amount of money Chinese banks have lended during the last 5-6 months is also higher than the cumulative lending by all the Indian banks put together
  
  

The Shanghai Composite has nearly doubled from its lows last November, leaving the rallies in Western bourses in its dust. The rally in China also has produced the frenetic trading that are hallmarks of a bubble. But this kind of liquidity driven rally is hard to sustain and eventually leads to the burst of a bubble.

With the Chinese bubble bursting, the global commodity markets will also come to a stand still and as a matter of fact the weight of the sectors that are commodity driven is over 40% on our benchmark indices. Any further slump in the global commodities will break the back of our benchmark indices and lead to a severe fall.

The Chinese bubble is completely liquidity driven which is slowly starting to burst. The idea is very well expressed in the following quote:

Chinese asset markets have become a giant Ponzi scheme, writes the highly regarded former Morgan Stanley Asian economist, Andy Xie. "The prices are supported by appreciation expectation. As more people and liquidity are sucked in, the resulting surging prices validate the expectation, which prompts more people to join the party. This sort of bubble ends when there isn't enough liquidity to feed the beast."

The Subprime Presentsation

Dear All,

As mentioned in the seminar, I am uploading the mentioned presentation on the sub prime crisis. This is by far one of the best presentations on the subject I have come across. A very interesting lay man approach to understand the crisis that has shook the world.

Hope you all will enjoy the same.

You can download the presentation using the following link

http://www.scribd.com/doc/18360616/Sub-Prime-Expl