Sensex 16000? A New Bull Run....

A lot of people of late have asked me where are the markets headed. The recent run of15000+ has left many disappointed since they could not participate in the rally. So was it really such a big loss? Not really.

In terms of a risk reward approach, the chances of the Sensex moving beyond 15000 was a lot less than it testing 12000 levels. Mere quarterly improvements in the growth of key sectors and market sentiments fed by the Prime Minister's guidance are not enough to sustain the current market levels. The improvement in industrial production, sectoral growth and increased demand have to be consistent for at least 2 successive quarters in order to start a pegging point for a long term bull run. Another reason that is feeding the current frenzy is that amongst BRIC nations, India and China are still the most attractive investment destinations due to the slack in Europe and USA. As the global economy recovers from its lurid state, the BRICS will benefit the most due to the robust growth that they are capable of sustaining.

Investor street is of the opinion that if the Sensex rallies beyond 16000 then fresh positions can be taken since the rally is then expected to continue for a while. But until the market breaks the 16000 mark, fresh positions are very risky and the market might test 13000 levels again. We remain bullish on Power and Infrastructure.

Investor Street Confidence Index (ISCI)

The Investor Street Confidence Index or the ISCI takes into account more than 40 parameters while analyzing and rating the top sectors in the country.

Based on this we have rated the following sectors for the near term outlook. The rating is on a scale of 5 where a higher rating signifies more investor confidence towards the sector. The findings of the ISCI are as follows:

Investor Street is overweight on Power & Infrastructure and these two sectors would be the front runners during the upswing. Post March 2010, Real Estate could witness the maximum inflow coming in and the economy is expected to be at the peak of the recovery mode post November 2010.
We advise investors to stay away from IT and Oil & Gas for the near term. Fresh positions in Power and Infrastructure can be taken with a horizon of 12-18 months.

100% FDI in Education?

The outflow from India on education to foreign countries is more than Rs 20,000 crore. Should 100% FDI investment be allowed in education and would it benefit the country? The answer to this is tricky. India on paper has allocated 6% of the National Income for expenditure towards education but the fact still remains that this has not been put in action. A 100% FDI was proposed in February 2007 but is still under the rugs. The fact is that if you are a believer in free markets than no sector should be government regulated especially when the country has one of the worst literacy rates in the world. Experts are of the opinion that the government sees this as a cultural and heritage issue rather than a market driven principle which is successful in many Scandinavian countries and in several parts of Europe. There is little or no funding for primary education for the poor in the country because that costs the government money and thus quotas are a easy scapegoat.

The issue of Karnataka enforcing Kannada as a compulsory 1^st language in schools proves this point. With an evolving world, knowledge needs to evolve and if privatization and globalization is the need of the hour then that is what needs to be done. History proves that customers at every level have benefited from free markets and Airlines and Telecom in India are living examples of this.

Auto Sector Outlook: SELL on Tata Motors

The Auto sector is perhaps one of the worst hit during the global economic downturn and the Maruti results were not encouraging with the company accepting that sales growth numbers of 20% would be impossible to achieve in the near future. The outlook for the sector remains negative and the sector will witness a growth of 5%-7% at the best. Keeping in line with the previous recommendation on Investor Street, we are still Bearish on the sector with the reassessment for the ranking due in April.


SELL call on Tata Motors due to a 34% fall yoy in sales to Rs 47,586 million on 31.7% yoy decline of volumes, mainly in the CV segment. The company incurred a huge net loss of Rs 2,633 million driven by a steep decline at operating levels and a forex loss of Rs 2265 million as compared to a net profit of Rs 4,991 million in Q3 FY08.

Why Is the Stimulus Not Working?

IBM, Microsoft, Lenovo Ericsson and HSBC combined cut close to 17000 jobs and this was despite the $819 billion stimulus package approved by the House in US. Things are no better in India. India Inc is expected to cut close to 27000 jobs by March this year after all the sweeteners the central bank has thrown at them.

So why are such large scale layoffs happening even after liquidity infusion in the economy? The problem still remains that mere indirect and direct liquidity infusion will not put business back as usual. Firstly, the lack in global demand is pushing the margins at which large companies could afford to operate initially due to the huge volumes. With these volumes hit, sustenance itself is becoming a difficult thing. Second is the problem with short term liquidity and inventory hold up cost. Banks are reluctant to lend working capital readily as they suspect a rise in bad loans and the inventory hold up cost is too much for the companies to counter without the sales happening. Lastly, quick cost saving initiatives in order to cut down on expenditure usually are the easiest to achieve by laying off duplication in work and cutting jobs. This as a part of Rapid and Sustained Cost Management is seen as a short term approach which affects the long term growth of the organisation. But for many companies, employee remuneration amounting to as much as 20% of the total cost, it is a forced choice.

Moreover, economists are of the opinion that the liquidity being infused in the country will show its effect post the first half of 2009 but this alone will not be able to get business rolling in the country.

When The World Tells A Story

It is difficult to put things in perspective and find out when exactly a crisis started and when it was at peak. But then too, a closer look shows us that the world tells a story when things are going wrong and shaping up a crisis.
Between September 2008 to January 2009, the Global Financial World told many tales and when the pieces are now put together, they form a clear picture of what we now know as the Gobal Fianancial Crisis of the 21st century.
USA - Weak economic data, withdrawn guidance by companies and talk of job cuts meant that US retail sales dropped by 1.2% in September 2008, which was the worst drop in 3 years and the third decline in a row. The Consumer Confidence Index fell by record percentages.

China - The Chinese Composite Index fell by 68.52% in 2008 as global demand for Chinese exports fell.

Britain - Economic output declined by 0.5% in September 2008. Argentine President's plan to take control of $29 billion of pension assets raised fears of a possible debt default by the government. British economy shrank by more than expected for the first time in 16 years. The Bank of England announced a cut in interest rates by 50 bps with a possibility of further rate cuts in future.

Japan - Sony slashed its forecast for annual operating profit by 57% on grounds of a stronger Yen and a worsening market for television and cameras.

Sweden - The Central Bank cut rates by 50 bps and hinted further future reductions.

South Korea - The Government announced a rescued package of $50 billion to rescue its bereaved markets. The country witnessed its slowest economic growth in 4 years.

New Zealand - The Central Bank cut rates by 100 bps and hinted further future reductions

Switzerland - UBS was forced by the Government into a $59.2 billion bailout

Russia - The Central Bank placed a rescue package of $26.6 billion in unsecured loans

India - Government injected Rs 320000 Crores in multiple phases. Inflation rose above 12% and IIP fell to record lows

IMF - Expressed intention to help Hungary, Iceland, Belarus, Ukraine, Serbia and Pakistan for economic programs backed by financing

The World Told A Story....

The Economics of Christmas

A very interesting article on the Wall Street Journal explaining the economics of Christmas caught my eye. The article titled, "How Christmas Brings Out The Grinch in Economists", talks about how some economists say we would be better off without Christmas as its an inefficient mode of connecting consumers to what they buy by squeezing all the purchases in a year end buying frenzy. Moreover, people spend hundred of dollars on unwanted gifts that might just be put in a box and kept in the closet.

This phenomenon can be explained by the economics of a gift. Studies show that people always prefer $50 as opposed to a gift of an equivalent amount. Hence, its safer and makes more economic sense to give cash. But this practice lacks the sentimental aspect that is connected with a gift. This Christmas, consumers are expected to spend more than $457 billion, which is approximately $4000 per household.

According to a study by Professor Joel Waldfogel of the University of Pennsylvania, consumers would save at least 25% of their spending if they bought their gifts themselves. That is close to $10 billion. In fact, gift cards for Christmas alone amount to a whopping $25 billion. That's makes the Economics of Christmas worth more than $500 billion if you take the total cost into account.

Merry Christmas....

Where Asia stands...

The question everyone wants to know is When will things get better? I am talking about Asia in particular and Asia has a very serious concern that investors in US, Europe and Japan might choose to part ways for the time being.

But an Asian Economic Report by HSBC seems to think that the prospects for Asia are positive. The report states, "Fundamentally, we remain of the view that Asia does not suffer from the same financial dislocations seen in the West. As we mentioned previously this should set up the region for an ultimately faster rebound once global financial market uncertainties begin to abate. Therefore, with perhaps the exception of Korea and India, most of the latest financial rescue measures are defensive in nature, rather than indicative of elementary financial vulnerabilities. The primary concern of policy-makers in Asia is to shore up growth. Other measures, such as blanket deposit guarantees and emergency local liquidity injections, therefore appear unlikely across the region, although a number of central banks may continue to provide dollar liquidity directly into local markets to ease external funding strains".

I personally believe that the Asian markets will see a run up only post a short term consolidation. This might take between 3 to 18 months to happen, depending on other economic indicators. The Corporate Results for the coming quarter will be the crucial indicator. If everything goes as planned, then Asia might see itself as the leader of global economic revival by the end of August 2009.

Subscribe

Sitting Out Professional Sports

Sports in US is bigger in more ways than one. For starters, its not just about a single sport (cricket), as in the case of India, but is a buffet of sports with equal feeding frenzy such as Super Bowl, Baseball, Ice Hockey, NBA, NASCAR or Golf.

So even though teams such as the Yankees saying to Bobby Abreu that "We can't pay you as much" or The New York Giants telling Eli Manning that "You're too expensive", is clearly not an option, they still have to somehow manage all this with the sponsorships dwindling and no takers for the Corporate Boxes.

Take Fedex for example. It used to be one of the front runners for advertising spots in the Super Bowl but is sitting it out this year. Similarly, the Dallas Cowboys, New York Jets and New York Giants are still searching for corporations willing to pay to put their names on stadiums the teams are constructing. The hit expected for advertising and Corporate sponsorship is on an average of 2 per slot which earlier used to be at least 10. This means that contrary to common belief, Professional Sports are NOT immune to the economic slowdown. This year the auction prices of Sunday Night Football tickets on ebay will come down and the top teams in the league are expected to lose millions of dollars in sponsorships and the league overall will see companies sitting out the season. In fact, some sports are expected to cut staff by as much as 2000 or more this year.

You thought Professional Sports were immune to financial crisis? Think Again....

Financial Crisis Takes Another Victim: Rubens Barrichello

If I had told someone a few days back that the Global Financial Crisis will cost Rubens Barrichello his job, then they would have probably laughed at me. But Honda's decision to permanently withdraw from Formula One may result in current driver Rubens Barrichello being out of job. Honda decided this week to permanently cease all activities in Formula One due to the global financial crisis and the slowdown in the Auto industry back home. 

Barrichello, who is the most experienced driver in F1 history, with more than 271 Grand Prix in his name and 9 wins has raced with likes of Ayrton Senna and Alain Prost. With Japan's 2nd largest automaker decided to close shop, it might finally come to light that Barichello is too old to be likely hired by any other team. Most of the teams by now would have already decided on drivers for 2009 or renewed contracts. It breaks my heart to see two of the biggest names in F1 (Honda and Barrichello) fall victim to the Financial Grim Reaper.

Will the Big Auto have to Merge??

As if the congress denying the Big Auto a stimulus package earlier was not bad enough, this might happen again a second time. GM, Chrysler and Ford are looking towards the Congress for a $25 billion stimulus package in order to keep the production and R&D alive. The concern is very real as without technological edge, the US auto manufacturers might be rolling out empty shells after 5 years and most of them might have to close shop post December. In fact, as per Big Auto, the real requirement is as much as $40 billion and even a stimulus package will not be enough.

If nothing else works, then it’s very likely that the 3 companies might have to merge. If that happens, then they may not actually need the Congress anymore for any financial assistance as the combined entity would be more than eligible for a loan from the bank to meet all requirements. I won’t be amazed. There are stranger things in Heaven and Earth than we can imagine.

A Take on: CRISIL India Economic View - November 2008

The table below shows the 8 parameters for which CRISIL has forecasted India's figures for 2008-2009.

Quite frankly, I find a few of these numbers too optimistic and a few reasons cited in the report by CRISIL too vague. Its highly unlikely that India's overall GDP growth will hit more than 6.5%. In fact it might be as low as 6%. I would be too optimistic if I say that the year end Rs/$ exchange rate would stand at Rs 45. Chances are that this figure might hover around Rs 48 after hitting a high of Rs 52. Moreover the country's fiscal deficit would see a slight relief due to lower oil prices globally and for India, its oil imports eat into most of what its Balance of Payment shows in the form of inflows. 

My major concern apart from all these this year are the FII outflows which I think will accelerate post the Mumbai Terror Attack. If Nifty does test lows of 1800 then it will test a lot of patience for many Domestic Institutional Buyers who have been trying to buffer the damage done by the FIIs. My take on IT/ITES, Realty and Auto this year is bearish and the year 2009 according to me will see markets being range bound. I personally see no mouth watering returns from the Indian stock markets during the year 2009 though I pray and hope that by 2012 Sensex hits 25000 (We all want that....Don't We??)

Globality: The 3 Indian Success Stories

A video showing you the story of 3 of India's biggest success stories:
Tata Motors
Bharti Airtel
Arvind Eye Care

An understanding of the idea of "Globality" and how companies in emerging economies are consistently beating competition at home and in developed nations.

Is GM Next?

Detroit is nothing less than the backbone of the US industrial base and the giant of Detroit, General Motors says that without the government's help in terms of a rescue loan for the industry, it will run out of cash by early next year and might have to file bankruptcy which is turn will start a domino effect that will hit thousands of jobs and hundreds of its suppliers and dealers as well as its Detroit rivals.

The help expected is in terms of a $25 billion rescue loan which several members of the congress are opposing while some others are supporting. One thing is for sure that if GM dies, then so will several other of its rivals and the auto companies in US which are already in a soup will no longer be in a position even to keep the shop floors operational. Recently GM's stock worth based on the predictions for the next 2 quarters and industry outlook for auto manufacturers in US was valued at around $1.
If this does happen, we might have a catalyst which could multiply the current economic crisis several folds.

Doing Business With China!!

When I read the article in Business Line today, it saddened me quite a bit. China which has of late become the face of the BRIC nations is turning out to be a wolf in sheep skin. Doingbusiness.org ranks it 83 for "ease of doing business" and 88 for "protecting investors". So when I read that several Chinese banks including the Bank of China had refused to honor Letters of Credit which they had earlier guaranteed to traders from India, it correlated well with the dismal ranking that the country had been given by the World Bank.

Several Chinese banks refused to honour at least 15 LCs, each worth $3 million, amounting to $45 million and these include just the ones reported against. The question one needs to wonder about is whether China injecting $500 odd billion in its economy gives it the excuse to refuse payment on LCs and other obligations it had guaranteed. Should the relief package come at the cost of payments to other nations and how firm do laws of International Trade stand when a country just gives you a deaf ear? If a country's banks act like this, imagine what signals it sends to the companies in such a nation. You decide it yourself....

Sarkozy's New World Order

Commodity Traders face High Tide

Iron ore prices have come down to $55 from a year high of $135. Similar is the story with most commodities. Sulphur for example is at $65 from a year high of $700 a tonne, which is a fall of almost 91%. The companies that would be hit the most in terms of margins would include:

• Hy Grade Pellets
• Kudremukh Iron

What probably comes as a bit of a relief is copper and other base metal prices easing up. If the prices of Iron Ore and Sulphur continue to fall then as many as 7000 commodity traders face bankruptcy with a combines losses in excess of Rs 64000 crore.

Mutual Fund Mayhem

Mutual Funds have historically been an relatively safer avenue for the faint hearted who is averse to the kind of risk pure equity brings. But though they have been the choice of investment for the last decade or so for the common investor, the industry is seeing the worst days ever and the most dismal performance recorded till date. Out if the top 55 funds across 11 categories, which means top five funds in each category, 33 funds have given negative returns in the last 1 month and most of these as low as -0.20%. Of the remaining, 17 funds have less that 1% or marginal returns and only the funds in the Gilt Fund category have give returns of 5%+ on an average during the 30 day period. This is not shocking keeping in mind the negative correlation Gilts have with Equity based funds.

Out of the 303 registered Equity Funds (Including tax saving & sector funds), only 10 have positive returns for the last 6 months. That a depressing performance rate of 3% across all existing equity funds.

(Data as per www.mutualfundsindia.com as on 5th November, 2008)

The demand for Mutual Funds is expected to fall by as much as 30% in the next 2 months and 4 out 10 funds will face massive redemption pressure. It might take as long as 2 years or more for the industry to see the kind of buying frenzy it recorded in December 2007.

Sacrificing Rupee for Stability and Security

The rising dollar in the face of the worst financial crisis US has seen since the Great Depression is not a miracle but a sound and systematic intervention which has kept dollar afloat. Its a simple case of "you scratch my back and i scratch yours". The Fed helped the Asian economies during 1997 and helped strengthen the Euro during 2000. Why? These countries understand that its in mutual interest to keep dollar stable and strong which in turn would enable currencies pegged to it remain stable and also be in the best interest of countries who have built up huge dollar reserves.

With crude eventually rising due to decreased supply by OPEC, its in every one's best interest to keep the dollar strong for the time being. In fact India's Central bank, The Reserve Bank of India has been piling up dollars since 2002 and has purchased $75 billion worth of USD in the last 4 years. It has bought on average of $10 billion a month for the last seven months. With dollar being the standard currency for global exchange and trade settlement combined with crude traded only in dollar, India is betting on being safe and sacrificing the strength of rupee keeping in view the long term interest of the nation. But this range of sacrifice in the near term is between Rs40 on the lower side and Rs 50 on the higher side. Any less of any more, and you will find RBI intervening.

Vietnam Next In Line

A bigger havoc tends to supersede a smaller incident at times. Whether the incident in question is small or not would depend on the degree of inference drawn. Amidst the hue and cry about US going into depression, UK cleaning its mess and Iceland melting, I guess people forgot about Vietnam. Vietnam has been a victim of instability risk.

The country has a trade deficit of 14.4 billion USD which has tripled over the last year. The imports have gone up by 67% and companies that were trading at a P/E of 30-40 last year are right now crawling at 10-20. The picture becomes clear when you look at the trade deficit in terms of the country's forex reserves that stand at just 20 billion USD. That sums up to 72% of the forex reserves. Analysts are looking at this as a trigger for a major crack in the economy and have put their money on several banks and brokerages falling. Another Bail Out??????