TEA stocks can give good short term return

Tea prices in the new season are at a decade's high on fear of global shortage, says Business Standard. This is mainly on account of a fall in tea output by both the leading tea producers-India and China.

India is the second largest producer and fourth largest exporter of Tea in the world, whereas
Sri Lanka is one of the largest exporters.

According to Industry experts the shortage is mainly on account of a less than average winter season rain fall in South India that has lead to a fall in output from both, the South Indian tea producers and Sri Lanka.

Dooars teas were selling at Rs 125-160 per kg, higher by Rs 20-25 while the small quantity of Assam teas that have made their way into the market were at Rs 140-150 per kg, again higher by Rs 20-25. (Business Standard).

Mr. Vishal Rati of HUL Tea Division says that "this shortage could continue taking the tea prices higher than the current levels" and Basudeb Banerjee, chairman, Tea Board of India, said, “It looks like a shortage right at the beginning of the year.”

Thus I strongly believe that it is a good time to invest in good beaten down stocks of tea producing companies. Based on the fundamentals of the industry I think that the companies which would largely benefit from the recent developments & the positive scenario in the industry are the ones possessing tea gardens & are into bulk tea business rather than too much involvement in packaged tea business.

One of the leading players in such segment is McLeod Russel (the next best investment could be Jayshree Tea), major player in auction tea markets and thus can take full benefit if rising prices through its auction system. The company is low leveraged compared to the industry and its figures for figures for ROA. ROE & ROCE for the are also rising over the past 3 years.

Thus given the current industry dynamics a 15-20% return in a month's time could be possible.

Elections and Stock Market Cycles

In the past it has being observed that the national level elections (In India or any big financial market) and stock markets follow a particular trend. Before the polling dates the stock market rallies, as the case is presently in India.

The experts say that this is primarily to get the people excited about the economy, change the sentiments so that the ruling party could bag votes. The other reason I believe is the main reason, which is to raise the money to fund the elections.

According to a survey by the Centre for Media Studies (CMS), even in this recession time the month-long general election beginning on April 16 will witness an outlay of something like 100 billion rupees (two billion dollars). Out of this a whopping 80 billion rupees are spend by different political parties and individual candidates for campaigning, (other legal/illegal issues).

The key objective is to win at any cost and so parties are opening up their purse strings for the elections," said Jagdeep Chokkar, a former professor at the Indian Institute of Management.

But the logic is that they don't spend from their pockets but try and earn the same from the markets and the market will only channelize funds once the sentiments are bullish so that the retail investors join the rally and right at the top the institutions (on behalf of politicians) book the profit and leave the retailers trapped and market sulking.

The same happened in the US presidential elections last year in November when all of a sudden without any big positive news the DJIA rallied by over 30% from its October lows. However this was only to make a new low post the election results.

Hence, I believe that although its difficult to resist oneself to join this bandwagon and go against the tide. But it would make much sense to book the profits at Nifty level of around 3150-3200 (upper level of nifty since last 3-4 rallies) and wait for any significant move on the upside my be above 3250-75 ) and then initiate fresh long positions.

D Financial Medicine ....

Let us assume that someone ill since last one year. He visits many doctors, take several medicines, however his disease is not cured. What happens is that every time he goes to the doctor, the doctor gives him a new medicine saying that it would act as a panacea and the moment he intakes the medicine (or only hears the news that a panacea will be issued) he jumps with excitement, goes out to play football and party's overwhelmingly.

The result is that after 2-3 days (or maximum a week) he is again down on bed and becomes more ill. The reason is that he did not allowed the medicine to take effect and heal properly. Simple medicine laws says that if one is down since a year (or any other longer time frame) and being offered a medicine, one should take due rest so that can be properly cure and not get excited and play football or jump.

Then what happens he goes to another doctor or the same doctor issues another medicine thinking that some ingredients in the last one was not appropriate and so a new panacea is announced. Again the history repeats and the patient gets excited and falls sick again. Again a new medicine and again excitement. This continues...

You must be wondering that its a financial blog and why am I writing on medicine... But I am sure that some smart ones must have guessed my rationale behind writing this. That severe ill patient is the global financial market (US to be precise) and the doctors are US FED, Government, etc and the various medicines are 'n' number of bailout packages/ rate cuts announced one after other.

Yesterday again the same patient got over excited, as it has being in the past, Dow Jones Index rising around 5% (in the past this has being 10%, 15%, ...) just after the medicine ($1 Trillion Public-Private Plan to Buy Banks' Bad Debt0m announcement. So what will the result be...?

As it has happened in the past. Every time DOW gets overexcited over some medicine, falls with even higher force and ultimately lower from where it started. Thus I strongly believe that this present rally will also see the same fate, may be today or tomorrow by this week's end.

So once the global financial markets take rest for months and allow the medicine to heal properly (this means no volatility or almost near to zero volatility) then only we can think about the beginning of the next bull markets.

Moving From Crisis to Crisis...

US has a very peculiar habit of moving from crisis to crisis and in between lies the bull market phase. The solution to take the country out of one financial/economic crisis invariably puts it into the other. The very low interest rates in early 2000s to revive the economy out of recession after the dotcom bubble lead to the housing bubble. The problem was too much liquidity chasing too few assets.

The steps presently taken by the US Fed and the Obama government to fight the current slowdown I believe can also lead to another crisis in future. The reason is that the liquidity situation is same as it was in early 2000s.

Same a zero to 0.25 % overnight interest rates range; a level reached in December (and expected to be in this range at-least this year). Fed further reducing the borrowing costs across the economy, pledging to buy as much as $300 billion of Treasuries and stepping up purchases of mortgage bonds. This unexpected move by Fed yesterday led to a good stock market rally in US yesterday and in Asian markets today.

However one should look at the things in a holistic way. Along with EQUITIES, OTHER ASSETS CLASSES are also rallying…MEANING THAT INVESTORS LOOKOUT FOR SAFE HAVEN IS NOT YET OVER. There is a big buzz that the worst is over, but if we ask a question that if the worst is over why is Fed still announcing new billion dollar packages to revive the economy (in addition to the trillions already announced).

The credit card defaults and pension fund redemption's, etc are the news flow likely to hit the global market and can lead to the last leg of fall.

Thus we are again moving into to a situation where too many dollars or too much of money due to "EASY MONEY" availability. The government is asking the already indebted US citizens to take more debt and spend and grow the economy...

Advance Tax Payments... Paint a mixed Picture

Many Indian companies made their advance tax payments for 4Q FY09. The earnings indication from the tax payments seems to be a mixed bag.

Preliminary information on advance tax payments flashed on CNBC showed a general slowdown with companies from the real estate and manufacturing businesses on the other hand consumer products and financial services companies, however, bucked the trend and paid more tax than they did last year—an indication that they expect to turn higher profits.

Large manufacturing sector companies such as Tata Motors , Bajaj Auto and Reliance have shown a contraction in their advance tax payments for the quarter ending March 09, while companies like HUL, SBI, Parle, LIC etc. have shown a decent growth in their advance tax payments.

All India advance tax collection until March 15, the last date for payment was Rs 2.82 lakh crore, below the budgeted Rs 3.95 lakh crore. The trend in corporate tax collections, therefore, provides an early indicator of the magnitude of fiscal deficit and the extent of upward pressure government borrowing can put on interest rates. "Advance tax is just a reflection of the economic condition we are in,” said Gaurav Taneja, partner at audit and consulting firm Ernst and Young

Hence, I believe that their is no need to get excited about earnings and consequently markets by seeing the number by banks and FMCG companies (which CNBC is highlighting again & again) because the picture on the other side is not that rosy. Moreover the credibility of these advance tax numbers are not very high since these are not published by any government agency and every TV channel/news papers cite source as "our bureau" and "our sources".

Presently one should wait and watch in the markets since the Nifty has again entered a range of 2700-2850 and only execute long/short positions if a breakout from the range occurs.

Third Front can be Disastrous for India

Yesterday an assortment of leftist and regional parties officially formed a "Third Front" to contest India's upcoming general election. The new alliance includes the Communist Party of India (Marxist), the Communist Party of India, the Revolutionary Socialist Party, the All India Anna Dravida Munnetra Kazagham, the Forward Bloc, the Janata Dal (Secular), the Telangana Rashtra Samithi, and the Telugu Desam Party.

Representatives of the Bahujan Samaj Party (BSP), which rules Uttar Prades did attended the rally that launched the Third Front, however it is unclear whether or not the party will join the alliance. This is because the present UP chief minister , Mayawati is reportedly demanding to be the Third Front's candidate for prime minister if the BSP does join.

I strongly believe that if the Third Front accepts Mayawati's demand and also wins the elections, this will be catastrophic for the Indian politics & economy too. How can someone as corrupt as Mayawati be India's prime minister...?

Moreover in the past on two occasions when a similar Third Front type alliance has come to the power, they were unable to come even close to completing its full term. This means if in this case the Third Front is unable to do so, will lead to fresh elections and disastrous on India's economic health as the quantum of money spent on one general elections is too high. This can severe the already worse deficit situation and surely a negative on India's rating. The left front is also known for all its conservative economic decisions, tax hikes for high income people, etc.. and in the time of turmoil could further add to India's woes.

Currently India's political risk rating by Economist is BBB and in case the Mayawati government comes to the power there is a certainty of rating downgrade since it has already expressed its concerns regarding the same. This will further lead to further reduction of FDI and FII investment in India since when comparing across economies as investment destination political risk is a major selection criteria.

Thus I hope that Mayawati's Third Front do not win the elections and as an eligible voter I would play my role that this happens and urge you to do the same as well.

Will Citi Group Pull up Sustain...?

The global stock markets rallied on Tuesday after Citi Chief Executive Vikram Pandit said the bank was profitable in the first two months of this year. Profitably of one banks lead to an amazing euphoria on the Wall Street and on Dalal Street too.

So it is worth parsing Mr. Pandit's comments. "We are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007," he said in a memo to employees. A Citigroup spokesperson said that Mr. Pandit's measure of profits was net income, according to US GAAP. This means that the bank was profitable after all its expenses, including write-downs and provisions for credit losses in the period, which are expected to be large.

But is this something that great that the DJIA rallied over 400 points in a single day and people started extrapolating this performance for the entire banking sector and saying that the
the government's bank-sector revival plan will get financial firms through the downturn. I seriously don't think so. Its again the same old habit of markets getting over excited...

Investors should treat the profit announcement carefully. The bank has assessed its profitability for an arbitrary time period. Often banks do not know their true expenses (write downs) until the end of the quarter and so the two months profit figure is hard to square with bloomberg consensus analyst expectations for the first quarter (which shows a loss). It is possible that bank's two month net profit got a boost from marking up its own debt as the CDS on the bank reflected higher fear.

Secondly, the timing of Mr. Pandit's comments looks opportune. His memo came the day after Sen. Richard Shelby of Alabama, the ranking Republican on the Senate banking committee, called Citi a "problem child."

Thus it would be foolish at this stage to assume that the worst for the US financial sector is over...

Banking Sector in Pain...

Over the last one week the Indian banking sector has being one of the worst performing sectors, despite the rate cuts by RBI. This negates the orthodox view that the whenever the central bank cuts the rates the banking sector should perform and also came as a shocker to many investors/traders. However if we look at one of the most basic financial market indicators-10 year government bond yield , it would seem that this was inevitable and will continue further also.

What happened last week was despite the rate cuts by RBI bond yields were moving up, this is because of over-supply of bonds. The government is flooding the market with bonds (to finance its high deficits) but banks don’t have the appetite for such a large government borrowing and so in order to attract buyers government have to offer higher yields and thus lower bond prices (Since the bond prices and Yield always move in the opposite direction)

For most of the Indian banks (especially PSUs) a major portion of their assets are invested in Government Bonds (currently fixed at 25%). So any fall in the bond prices mean a MTM losses for the banking companies and thus a weak performance by the banking stocks.

I believe that due to worsening macroeconomic situation and widening deficits the government borrowing programme will continue putting upward pressure on yields despite the rate cuts and thus the Indian Banking Sector should remain weak in the coming weeks too.