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

Week of 31 Aug 2009

Quite some data coming in this week:

India:

Monday - GDP last quarter, expectation is around 6%. fiscal deficit for June.

Tuesday - ABN PMI Index , was 53.3 for July. Monthly auto sales. Trade deficit.

US:

Friday - job data

Nifty still going strong, but there has to be a correction as the index as well most sectors see overbought. Among other sectors, IT seems slated for a sell off, RS appreciated some last week and may do more this week. Micro Tech looks good to buy, Patni/Oracle finance good to sell. Others scrips I was hoping to buy like have all gone up way too fast, so need to wait for correction. Lower GDP number will be good as it will create a buying opportunity.

Week of 18 Aug 2009

Holding period is important, just churning is not very helpful. If you like something, stick with it. for stock picking, finished another book which supports Graham: invest in high ROC low PE companies. but then decide the time to buy based on tech and overall market, so you can buy on a dip rather than at a top, so may use further refinement such as price viz--viz 52wH/L ratios , other pivots and tech indicators.

for the coming weeks, why there should be a correction:

Macro View (money week and some other blogs)

- in the most recent IAA (investors America) sentiment poll, about 53% think markets will be bullish, this was so high last time right before the correction in Jan 08.

- mutual funds in the US have seen 20 consecutive weeks of net cash inflow, which means retail investors are finally getting sucked in.

- Short interests are down, which means the short covering which helped propel the rally will not happen

- September is historically the worst month for markets

- Volumes have not seen the kind of building up which should have come with this rally.

Tech View – most short term indicators are signaling to a correction, although long term indicators are still bullish.

India – bad monsoons, but better IIP numbers, positive Direct Tax Code (surprising as this is supposed to come in effect by July 2011, that too who know, why should nifty jump 130 points?).Was there anything critical in PM's independence day address?

US – Bad retail sales, bad consumer confidence, another big bank bankruptcy in the week that just ended.

Coming week – Japan data, some important data on US housing and housing earnings.

To watch - Salon, Andhra Cement, Orient Paper, Oil Country (Mind you these are based on fundamentals, so don't expect immediate returns)

Calandar & News

indicatos say something and news takes the market somewhere else. pissed me, inlcuding links to economic calandars. before you buy, check the goddamn sites to see if anything is going to come out and get straight into you ass right after you went in a trade saying yo yo.

Week of 27th July 2009

nifty shuold rise on month on month and daily basis but may fall on weekly basis.

will follow gold as well going forward. Gold seems will fall from daily and intraday rsi ew etc, but should gain on weekly basis. There is a price vol divergence, but negative stochs, rsi so may rise after a dip, whether the dip will be day long or hour long i dont know.

Week of 20 July 2009

Clearly, news seems to be more important than many other fundamental factors in recent times, so in that sense, macros are ruling as of now.Now, with the new government not having announced anything in the budget, its obvious that they will keep announcing one reform here one there, so probability of positive news coming in from time to time is high in the next one year. Yes, negative economic data will come from time to time from the US ( e.g. CIT going kaput), which will drag the market lower but will have less impact than the positive local news. With this hypothesis, overall sentiment seems long to me in the medium term. Why its not so in the long term is because lending still hasn't started yet. Whatever little is happening, its by the governments, so without any capacity building in the private sector, where is the 9% growth going to come from, something to this effect was pointed out by my able friend Ken. so, up for 6 months yes, then either drag, stagnation or some fall back in the markets cant be ruled out.

Now to the charts:

Nifty - I think looking at only daily data makes sense for main theme, which only should be confirmed by weekly or monthly trends. So what am trying to say is, daily movement should be the guiding factor, more so with the way things have been in the current market when:

stage 1. news comes, market moves in one direction for 3-10 days,
stage 2. if more news comes, move continues else market starts to turn choppy
stage 3. opposite news comes, and a revese trend starts for 3-10 days.

clearly, by the time things start reflecting on monthly data (weekly will still be ok), things start changing.

Daily - Stochs positive, RSI positive. momentum about to turn positive. Elliott wave upward 3rd point to be formed so room for more upside. previous highs were 4390, 4424 and 4517, 4655. current close is 4375. good candle (don't remember the name). just outside KLT but within BB.

Weekly & monthly data : room for upside as seen in KLT. stocks negative and RSI is alos about to head in overbought zone, overall seems like the week's 10% positive run is about to reach an end, but may take a few days, to go up it needs to break the 4424 level on weekly and 4448 level monthly, awfully close, which i think can be a kind of momentary stop before the market chooses it next course.

Other thing to watch will be the earnings, which am not so worried about, clearly all analysts were playing safe by being overly pessimistic. However, CIT may have an impact, not in this week but in the weeks to come, if there are too many strings attached.

consumer backdrop

Before money finds its way into each of the asset class , we mention all important american consumers whose spending happen to be the drivers of US economy and some may argue drivers of exporting economies also. Having lost around 20% in their house value, combined with 10% unemployment rate, which is having every 10th neighbour without a job, the consumers have suddenly realized importance of saving more than speding. also evidenced by the personal income and consumer spending number which came after they received tax credits from obama gov.

Asian consumers are also not in the best mood to spend, as linkages of global recession have not eluded them completely while their respective government stimulus may cover up growth at interim but they would definitely end up being far inferior in capacity creation than corporate spending of the same magnitude.

Where is the money?

First whether there is money?. Central banks have outdone each other in terms of flushing the banking systems with liquidity from eonia to sonia to libor to desi mibor all of them easily closer to their historic lows. So, plenty of short term money but what about long term money? its definitely not cheap as the yield curves across the globe are steepest again at all time kind of levels. but that is not the problem, problem is demand? there has been 0% credit creation in India, one of the fastest growing economies in the world, in this current year so far. just wonder what would be happening in the Recessioning nations. whatever loans and credit offtake is there, it is for substituion or repayment or some such thing. So no fresh credit demand from corporates i.e. no capex. (ofcourse credit creation is getting substituted by huge government borrowing but for expenditure not capex) So from the money supply side, world economy resembles a patient who has very good life support (money market) but no outlook on when he could have his steak and fine meals(capital markets).

So bottom line there is money, but very hot, can disappear easily.

Now where does the money go?

28 June 2009

Markets are still weak.

Indian Bank looks good:
monthly data: high 154, low 123
last week data: high 143, low 127.
Daily data: high 143, low 123 ( so weekly high was achieved on the last day of the week)

Notes:

Macro: banking is still good.


Fundamental - low pe (4.86), 52 week high 153. roe 22.53%, last div 30%, book value per share 153. free cash per share 81. bad current ratio but good quick ratio. sales, net profit and net profit margin all went up in Q109.


Technical: Daily RSI just turned positive, MACD about to cross zero., stochastic went into overbought zone. short terms average just went above long term average.

weekly, monthly momentum, RSI signals bullish. weekly short term average above long term average

Risks: trading almost at KLT upper limit. monthly short term average still below long term.

(Confusing point - whats better: move in when stoch goes above average or should one wait till macd fires)

will see, as of 26 june friday, indian bank closed at 141.

Portfolio

Porfolio Characterstics:
Holding period - 3 months
Target Return - 12%
Stop Loss Exit - 20%
Capital in one trade - max 5% of portofolio
Hedge - none, only through margin play

Allocation (Soros):
60% - cash stocks
20% - marging plays/f&o
20% - cash

MS Recommendatoin - Cyclicals/industrials
Lookout - Special situations (saytam, unitech, adlabs) with capital allocation of 0.5% of portfolio

Week 21 June 2009

Am bearish going into the week based on some of the tech indicators and F&O data I looked at. there will be a small pull back that will try to take the index to 4400-4450, if it hold at that level then it should go further up, else it will come down and go below the current level which is 4313. lets see.

FOMC auction as all are saying will be a key event, i dont see why so much fuss about it. there is a ton of data to be out this week in Aisa - consumer index, personal spending data etc from Japan.

Wondwring whats the way to play the lag in monsoon.

And, finally, I want to short steel companies. But I cant.