Sunday, August 30, 2009

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

Monday, August 17, 2009

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."

Monday, August 10, 2009

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


Monday, August 3, 2009

Changing the Fundamental Economic Structure...?


GDP is defined as sum total of income or expenditure of everyone in the country. The expenditure approach adds up the value of total expenditures in the economy. Thus the GDP of any country is


GDP = Personal Consumption + Investment + Government Expenditure + Net Exports



Every economy has an inherent fundamental structure and it grows adhering to that structure. For example the US economy is consumption driven and the huge consumption growth is netted off by a large trade deficit (US is a net importer). German economy is completely investment driven. World's top engineering and mechanical firms are from Germany, take the likes of Siemens or Volkswagen. Chinese and other Southeast Asian economies are mainly by exports and then a little part is consumption also.

The point I am trying to make here is that some or the other characteristic is inherent in each of the world's economy and those characters are the fundamental drivers of their growth. The way a tree will only grow if its roots are watered and not the branches or leaves, in the same way an economy will also grow if its fundamental structure is properly looked after.

The moment the global economy was in recession, the pundits started blaming USA's consumption dependency, China's export dependency and so on. They started suggesting policies to fight the recession, which were quite different than the fundamental structure. This I believe is and will be the cause of slow recovery. One can not challenge the structure and still expect recovery.
If US have to grow now it has to be consumption that can drive the growth. US economy is super well developed and thus does not need infrastructure investment and its not a low cost destination so that it can be competitive in the world export markets. The government is already finances loads of industries/benefit programs and they can not increase their deficit further. Thus the only tool left is consumption.

In the same way Germany can only grow if it takes advantage of its huge economies of scale and Japan by exporting world class cars and technological equipments. If one is suggesting an alternative recovery, then probably he is expecting some sort of miracle which does not occur in the real world.

Hence, the policymakers need to understand this and take the right steps otherwise the 'green shoots' of recovery will slowly turn out into 'yellow weeds'. This “recovery” has fragile foundations and the big source of demand—government stimulus—is unsustainable.

Governments can prop up economies temporarily, but rising budget deficits are not a route to sustainable growth, because 'G' is not the only component in GDP, the Cs, Is and the NXs also need to come and more so according to the structural requirements.

As the Economist says " The hardest part, however, will be the microeconomic reforms required to smooth the macroeconomic adjustments. China’s leaders need to boost household income (for instance by encouraging more labour-intensive growth and forcing state enterprises to pay fatter dividends) as well as improve health-care and pension provision so that people feel less need to save. Japan and Germany both have to encourage investment in services, by freeing markets from health care to education. America must counter the rigidities that have arisen after its asset bust. Millions of people with negative equity in their homes, for instance, cannot move to get a new job"

The to-do list is a long one, the risk of missteps is high, and it will take years to complete. That is why the world economy is not yet out of the woods