GAAR Effect

Not just the name but also the intent is fairly inappropriate. The finance secretary said that we are not a banana republic (forced me to think though) where anyone can come, make profit and leave without paying taxes. It beats me somehow why someone would pay taxes if he is not required to pay any under prevailing double taxation treaty. May be out of charity he meant. I believe supreme court found government's argument baffling and gave verdict in favor of a telecom which became the genesis of GAAR.

What I find banana republicesque and somewhat draconian in all this is how government is changing the tax rules with retrospective effect. Is it so that the rule of the game, if government is on one side, can change in past, present and future depending on whichever side they are rubbed?

The correct thing for government to do is to accept its mistake, learn and correct it with immediate effect. There is going to be more damage than benefit from penalizing someone else for your own past mistake. For equity markets, I think the flash crash of last two fridays gave a glimpse of what is in store for nifty going forward.

RBI tunes to FM

The finance minister explicitly mentioned about the policy reversal some 30 minutes before the RBI were to announce a 50bps cut.

Unlike other wise men, I dont think RBI was wrong to cut rates by 50bps, and it certainly hasnt let its guard down on inflation; 8% of repo rate is fairly high by itself. The problem is something else.

The rate cut is likely to bring the bitter truth in front of everyone and the markets. The bitter truth being that growth wasnt really slowing down because of rates, but for inherent structural reasons. The realization may cost Nifty its prized resistance of 5180 and some more

What to expect in RBI policy?

There are many who almost always hope that RBI may pull a rabbit out of its hat and markets will never have to worry about macro bull shit issues again. They buy bank stocks, probably the worst performing ones to get full bang for the buck, and bankex futures and on the policy day they begin to chant subba subba subah subah. The evenings are much different. They learn few more things about economy and headwinds that face the economy, and in the end they happily sacrifice their money bag dreams on the altar of growth inflation dynamics.

The process repeats itself in next policy.


Central bank in India doesnt have the luxury to give markets anything more than the bare essential. Its hands are tied with inefficient yet populist government, corrupt yet ambitious businesses, lazy yet vocal critics, high maintenance yet essential foreign capital flows etc etc.

I guess nifty will soon break its 5180 resistance

Gold Fixed

The crackdown had been unusually stringent and exactly how our previous blog had envisaged. A first commendable action by Pranab da.Both RBI and Finmin had taken several steps notably

1. Raised customs duty on gold imports to 4% from 1% last year. Great step but need to do more, atleast 10-20%

2. Secondary purchases of jewellary to be taxed at 0.3% of value, and brought under the radar of income tax authorities.

3. Gold finance companies to lend only 60pc LTV

4. Reporting of gold imports to become more stringent


These regulations are powerful and completely justified, and most likely should help a bit in freeing our country from this expensive addiction. The country cant afford to indulge in this useless commodity. An interesting afterthought on why RBI is also worried- possibly because every household that stores gold becomes a mini central bank by itself and in a way becomes direct competition to RBI and INR together

The Enigma Named Gold

Bubbles are no strangers for financial markets; they only burst after the last man had joined the party. The time for gold has come.

Gold and Oil present the most complex challenge for world as to what their fair value is. Doesnt matter if one of them is immensely useful and the other utterly useless as a matter; both sit comfortably in any smart fund manager's portfolio in fairly long position.This post will talk about gold and not oil, because that yellow metal is the biggest enigma to me. The only value in gold is that it has been considered valuable since generations before generations. A perception of value, not utility not productivity not cash flows, is the value of gold. Gold has been there since donkey's years, it is the veteran, the senior most investment class. Gold has been the currency of kings and gods. Buy gold and enjoy the sublime.

Bullshit!

Gold is flawed investment class from both individual and societal perspective. Must admit though that it is fantastic as a jewelary item. Gold, unlike bond, stocks and real estate do not generate cash flows in INR or USD or any other currency. Investors who buy gold generally dont care about those lost cash flows which would anyways be worthless due to inflationary policies of governments and money printing by central banks. Therefore as a humble protest or hedge against incompetent economic system and policy makers, investors world over buy gold and have been served well so far. Little do they realize that to safeguard their priceless physical gold they are just as much dependent on the same incompetent governments and political system, thus rendering the hedge useless. And honestly who wants to hold the physical cash or gold in his lockers while the whole of ocean11 is out loose. I seriously believe that a treasure chest of gold may bring as much anxiety to the holder as it could bring prosperity.

From the collective standpoint, gold is a form of saving that destructs economic activity and increases societal inequality. Simply put, the $10bn amount that indians invested in gold this year could have been deposited with banks and lent onwards to productive parts of economy, or could have been invested in bonds that created infrastructure and jobs. Add up all the investments of past, and you'd know how handsomely gold has contributed to the pathetic infrastructure and the laggard economic system of country. Gold is an evil for economy like ours, and should be either banned like it was in US till 70s or taxed heavily at purchase i.e. upwards of 50%. High taxes are justified because an investment in gold will never generate any income and hence would hardly pay any taxes in future.

While gold is doing a great job of adorning our women, it has no business in strangulating the productive needs of our economy and hence it is the need of the hour to free our country from the clutches of enigmatic yellow metal.

Defence rests.

Telling the Tail

- Greek crisis

- Subbu’s half ton ( 50 bps)

- Debt ceiling and the politics and the last minute whimpy plan

- ECB crisis once again

- US of one less A

- ECB again

Above is the list of things that have happened in the last two weeks. When you say long tail, one of the above is enough. What do you call a succession of such events, right one after another – grandmother of long tails? I lost money in options and am going back straight in. Is above the normal world now, I would rather see it for myself.

test auto posting

Signal Triggered At 12/07/2011 15:02:53

Trade:  HINDUNILVR.EQ-NSE

Action: close short: short pnl(per share) = 2.60000000000002

Price: 332.4

Leader says what

Triple Play

Bespoke Investment posted this article: 

Each earnings season we put an emphasis on the companies that have reported triple plays.  These companies beat earnings estimates, beat revenue estimates, and raise guidance.  We consider these stocks the cream of the crop of earnings season, and we find many of our new long positions from this group each quarter.

So far this earnings season, 55 companies have reported triple plays, which is 8% of the total companies that have reported.  A list of all 55 companies is provided on the last page of this report. Ten of the 55 stocks stood out the most to usNot only do these names have strong technicals, but they also have positive momentum on the fundamental side because of their strong earnings reports. 

The last line is the key i believe.

Full article here: http://www.bespokeinvest.com/thinkbig/2011/2/3/top-earnings-season-triple-plays.html

3G boon or bane

An extremely efficient auction of telecom spectrum brought out so many evils in the Indian economy that I now wonder how shaky foundation is our nation built on.
First the facts - Inspired by other nations who made a fortune from 3G auction, our government hired lazard to conduct the prized auction in similar fashion. The big hope was to generate 35,000 cr so as to fund the bloated expenditure bill of government. The auction collected 105,000 cr as Bharti.Vodafone Tata and Reliance fought the battle for exclusivity.

Consequences -
1. This was the genesis of 2G scam. The revenue department quickly realized that the license fee that it got for 2g was a mere pittance. With this realization, parliament stopped functioning, ministers head begin to roll and skeletons began popping out of closet. The political turmoil that followed was no great news for stock markets.
2. This sucked the life out of banking system. It took some months for banks to realize that it truly was a lethal blow and then they began pulling all levers raising all rates frantically. Meanwhile the lifeguard of monetary policies, RBI, was tightening at snail's pace.

Crystal Gazing 2011 - India

Let's go a bit detail on India. I would focus as much on markets as I intend to do on overall economy. They are distinct in a way that markets tend to become the lead indicator of economic expansion and lagged indicator to a crisis. Call it positive convexity

1. The economy is poised to run full throttle as consumers and businesses race against each other to create demand and enhance supply respectively. The outcome of this race at various stages, will decide the course of inflation. Going by the tradition of conservative capacity expansion by domestic buinesses, I believe, demand would usurp supply for atleast few more years keeping inflationary outlook uncomfortable. The supply constrained economy of ours has been feeding two monsters since long time 1) current account deficit and 2) fiscal deficit, as they help in augmenting domestic supply, one directly and other indirectly. While a robust growth in economy would reduce the relative size of these external sources, there is a risk that they too grow at a same clip or higher. Since the solution to trade gap lies only in building manufacturing and technological capabilities within the country, there is really no solution in the short term. The fiscal situation is also not rosy given that the recent shellacking of ruling party will likely keep them populist and extravagant. So my guess is that both these deficits will remain high, one out of choice other by compulsion. Few enablers that may prevent the deficit problem from spiralling out are 1) fuel price deregulation and 2) tightening of monetary conditions. In absence of global shocks, Indian economy will try to seek its goldilocks condition where there is less of firefighting and policy uncertainty going forward. My view is 2011 is not going to be that year, but 2012 could be.

Broadly my sense is monetary tightening and high commodity prices will prevent the economy from overheating, but we may still clock a 9% growth next year.

2. Its increasingly being feared that the money from emerging markets will find its way to developed markets, as relative attractiveness of those markets increase. This is the new theme which strategists are clinging on to because of its intuitive appeal. I feel enticed to reject it outrightly, but out of modesty, I believe that the reasoning is quite flawed. Equity markets do not have to worry as long as money find its way to some other equity market and not towards USTs. As long as risk appetite is there, emerging markets provide very useful diversification and will continue to see incremental flows. Put it simply - if dow goes up nifty will not go down, it doesn't happen that ways. But at the same time I have no notion of immediate gains in Indian equity market as well. The scam season, tight liquidity, rising rates and rising costs will keep the markets on toes for atleast another 2-3 month. The risk on short side, however, is that all these problems may end all at once or so it may appear. And if earnings keep the pace, market will just reset to factor in even better 2012 earnings.

So my guess is we may see a 500-800 point surge at somepoint during this year, leading to an all time high on Nifty, and therefore every dip for me is a buying opportunity. For bond markets, I believe there is going to be a demand drought for a really long time as banks are invested neck deep even while SLR requirement are being reduced. The bond market is on RBI life support (read OMO) , and may tank once the support is withdrawn.

Happy Investing !!!

Aisa Outlook 2011

Several of them already in, more to follow. Will be adding to this post the different views:

1. Good discussion at MoneyControl with Jonathan Garner, chief Asian and emerging market equity strategist at Morgan Stanley :

The bigger story is not so much funds flow between different countries in Asia and emerging markets as maybe funds flow that could be heading out of Asia and emerging markets, back into the developed markets, particularly the United States where we are now expecting a 4% GDP growth next year

India, he says, is more vulnerable to higher deficit and, therefore, he has turned underweight from equalweight on India. Garner says corporate governance is the key reason for the recent contraction in prices. Hence, most FIIs are concerned about the price contraction in India. He also adds that higher crude prices are a headwind for emerging markets and he sees a divergence in demand growth within energy and materials.

Their sector view: We like sectors in markets that are more oriented towards the US. So the tech sector certainly has some positive features in that regard. We are also looking heavily at the mid to late cycle sector outperformers which in rising inflation and rate environments tends to be energy and materials. Upstream energy names particularly, in oil and coal. Those are areas that we like across Asia

http://www.moneycontrol.com/news/fii-view/morgan-stanley-underweightindia-sees-lower-fy11-nos_505992.html

2. CLSA expects Indian markets to decline in 2011: The money apparently is going away from emerging markets to the US. Russell Napier, Strategist, CLSA in an exclusive interview with CNBC-TV18 says, he sees more upside in the US markets.Napier further said he was cautious on emerging markets asset prices. “The authorities in the EM will be watching like a hawk for asset prices inflation and trying to keep that in an orderly fashion. As equity investor, that’s the real reason for caution rather than just inflation per se.”

http://www.moneycontrol.com/news/fii-view/clsa-expects-indian-mkts-to-decline-next-year_506330.html

3. ET Now intereviews DSP Blackrock: http://economictimes.indiatimes.com/opinion/interviews/banking-stocks-to-lead-the-rally-overweight-on-pharma-anup-maheshwari/articleshow/7149786.cms?curpg=1

India suffering from policy paralysis at this point , important that that solves itself early into the year.

The budget is not as important an event as the fact that it should just go through relatively smoothly.

Apart from that, things like the macro headwinds on oil prices, interest rates, inflation etc.

Top 2 Themes for 2011:

• Capex: very interesting with cycle in the later stage of investment. Capital goods space.
• Media: Some degree of deregulation may help, people particularly in the distribution space and media. Albeit a very small one.

Other pointers:

• Power: Huge macro headwinds - environment, fuel supply, coal, pricing power, Not the healthiest. Good overall for the economybut may not be as robust for growth.
• Pharma: Good long term defensive sector with a fair degree of growth attached to it, so makes sense to stay invested with high quality names.

more to come

Strategy: HYP

Just saw a video which talks about a Stephen Bland’s HYP stragety (quite popular supposedly):

http://www.fsponline-recommends.co.uk/page.aspx?u=dvlvid1&tc=LDVLLC01&PromotionID=2147067369&
While everybody today is talking about churning out million trades a minute through their high frequency low latency systems, the author reiterates a long term approach to investments which focuses not on capital appreciation but on income yield, sort of creating your own pension stream. He bascially says don’t worry about capital appreciation, invest in stocks focusing on the yield, any capital growth that happens is an icing on top. Stocks with good dividend yields not only provide an income stream, but are also less volatile and less suseptible to crash in bear markets, and for these same reasons, do even better in bul markets.

I found the HYP strategy even more interesting given how low the yield environment is currently. It’s also obvious how a strategy like this will not be recommended usually by brokers, because HYP means very little churn, translating into very little brokerage for the broker. Makes sense.

Here is the stagey in a nutshell – Create a diversified portfolio of 15-20 shares over a period of time (say adding one per month, jus to make sure you don’t catch the market at any peak valuation) with no intention to sell and primary focus on income. While selecting the stocks, observe these points:

• See if they can sustain the dividend through various businesses
• If they are not paying dividend to mask deeper problems
• Can sustain market conditions - diversify

A simple way to observe the above points is as follows:

• Buy big caps - they are safer
• Check the dividend history – has to be a good track record for many years over
• No debt – stay away from companies with high leverage
• Sector diversification – diversify, because if this portfolio is your source of income, then it has to withstand different market cycles
• Strategic ignorance - something am missing here.
• Reinvest the dividends – while the dividend is the really an auxiliary income, part of it reinvested can only add to the yield

Clearly this is not for kicks, idea is to put in the money and forget it. Ignore the news, ignore the prices and ignore the temptation to sell unless there is a very strong reason (need cash, there is a better investment, etc)

Crystal Gazing 2011

US Economy should register above normal growth in 2011, with the backdoor fiscal stimulus (read extension of bush tax cut) and monetary stimulus (QE2) encouraging above par spending and investments on the ground. The improving economic outlook and rising business confidence will trigger risk taking and robust hiring by corporates, and therefore would take care of employment situation slowly. However, housing market will remain one big drag for the economy. Overall, the year 2011 in US will be the year of reckoning for the main street but not so much for wall street.


European Economy will continue to languish with high likelihood of sovereign default risk spilling over to portugal and/or spain. The order of Europe has become rigidly hierarchial and may cause political unrest anytime. Overall european growth will be bumpy and noisy.


The fast growth of Asian Economies is mainly due to the yawning gap in GDP per capita that exists between developed countries and the emerging countries (euphemism for poor countries). Since the gap is not filling any time soon, Asian tigers may continue to roar next year also. The risk of flare up in commodity prices, which China may once again be found fanning rather than dousing , may act as a speed braker for Asia. Overall we should not expect any major surprise from Asia other than what possibly could come from Korean peninsula.


Up next, India

Strategy: Pure momentum play

• Compare the total no of volume price gainer and loser for the day -a 70/30 skew is the direction – which although is only partially important
• Classify the gainer loser stocks in sector buckets – any sector with many entries will give the market bias for that sector
• Pick the sector which has a bias, then pick top 3 stocks in that sector
• Take position in line with the bias next day, limiting going in price to current days high or low depending on whether the position is long or short.
• Overall long and short (may) be dollar neutral.
• Need to understand if it makes sense to put a cap on the no of holding days, say 3.

Caveats:

• Doesn’t matter if a stock is looking cheap on PE etc
• Doesn’t matter how much the stock has gone up or down
• Even if the stock has gained a lot, don’t short even if the price volume says so if the sector bias is not short
• Even if the stock has fallen a lot, don’t buy even if the price volume says so if the sector bias is not long
• Don’t fight momentum, let the correction begin, which establishes the low or the high
• Rules above are easy to write down, but very hard to follow

Jumping

Jumping between two levels and many sublevels for many days now – starting at the very bottom where price of one security X is the only cause and effect. Prediction of X given the non linearity of prices is not an easy task and many models from time to time have been suggested:
-simple brownian motion
-more complex markov models
-garch/arch models
-kalman filters
-neural networks/genetic models
-vector quantization/information theory

A very simple approach will be to use high low regression divergence and any movement beyond say 95% confidence interval should provide a trading opportunity.

Now taking the 50,000 feet view, world can be defined as a vector space of n dimensions with the various dimensions being important economic variables such as interest rates, currency, inflation, commodity prices (oil/gas/gold), money circulation, broad market index, credit growth rate etc ( and of course the momentum/rate of change of many of these). The price of the security X is a function of the state S of this vector. Now as the state changes from S(t-1) to S(t), the predicted value Xp(t) and the observed value Xo(t) are compared and any difference in them provides a trading opportunity. This, while may seem like mean reversion, its now, because there is no mean here to which the price is expected to revert.

While combining the micro with the macro may sound like a great idea there are infinite challenges to implement this – even for the macro prediction, one can begin to ask if GARCH model is better then the Kalman filter. Then there may be divergences in predictions in the micro vs macro data points, which may be simply timeframe issues as some variable are sticky and move slowly, while momentum is an important factor in price movements.

Taking a Long view

Every one seems to be wondering whether this fall is temporary or there is more to it. These discussions are bound to happen once markets pick up a trend and stop moving sideways. On one side of argument there are equity bulls who have history on their side, both recent and past. The other side has got a neat set of rationale, like always, but along the way of recovery they seem to have lost their teeth and are no more confident of their own prophecy. Nevertheless their arguments are sound.

But from whatever little I have learnt from the markets, I am reasonably sure that the rising equity market, just like inflation, is a necessary evil for the world we live in. Its always good or atleast projected so, for common people, businesses, governments and countries etc. No doubt why the biggest and most powerful bears of the lot, read central bankers, have never tried to prick a stock bubble directly.

8 Oct, 2009

Inverse relation of Put Call ratio and volatily, with PCR leading the Vix:

http://www.market-harmonics.com/free-charts/sentiment/pcvi.htm

Correlations

3 studies have piqued my interest:

1.Correlation between monetary base and the stock market – monetary base can lead the stock market: http://www.andykessler.com/andy_kessler/2009/10/dow-jones-vs-the-monetary-base-chart.html

2.Correlation between BAA-AAA spread and stock markets – generally assumed that the BAA – AAA spread leads the stock market on a monthly moving average data basis: http://seekingalpha.com/article/134964-choice-of-yield-spreads-as-stocks-indicator

3.This is known but am thinking how this can be extended to equity market - Correlation between forex rates and the treasury rate differential between the two countries: http://www.investopedia.com/articles/forex/05/041305.asp

Idea is to use any/all of the above to see if the current market rally is anywhere close to coming off steam.

Week of 30 September 2009

Holidays, reading and some gyan for remembering later:

Jim Rogers: Invest in companies/countries which are 1) cheap 2) are about to face a dynamic change such as end of dictatorship, end of closed markets, currency deregulation, increasing trade surplus, end of wars etc 3) will survive hard times. Follow the rules of basic supply demand.

Based on the above Sri Lanka is a buy now.

LP:

S&L crisis strategies: buy commerical real estate loans which are selling below par but are 1) from brrowers about to go bust, so when they do, feb will bail out and pay full value of the loan 2) for those porjects which are very sound and will be bought by either the residents or someone else so developer will be able to repay the full loan. same applicable for pool of mortages.

may not a big deal - buy something which everyone is selling, for it must be cheap.

can be big deal - use secondary, tertiary analysis. a tsunami in mexico will increase demand for oil so buy oil, but 1) also will hurt corp 2) govenrment will support the economy by lowering rates, bullish on bonds 3) domestic funds willl buy peso and sell international currencies to support internal economy so peso will rise, etc