Saturday, October 8, 2011

The Great Chinese Economic Paradox

Outright Disclaimer: This is purely a hypothesis and it may be completely wrong and baseless. This post intends to just open up a possible perspective in the economic dynamics amidst volatility in global capital markets.

Currently, we are under the asusmption that China holds a lot of foreign reserves and it is indeed true that countries, banks are lining up at Beijing in the hope that some relief can be sought from there with the vast foreign reserves that China has. So far so good - there is not an iota of doubt that currently, China is the largest holder of US T-Bills, and Euro Bonds from different countries and these very bonds are helping as collateral to provid the lines of credit to Chinese exporters and western importers to enable transactions take place. However, my opinion is that all this will only work well to the extent exports from China do well and payments are being honoured.

Now it would be very naive to assume that with constant devaluation of USD and EUR, the value of Chinese foreign reserves would keep on depreciating and if China knows this fact, why is it continuing to buy these reserves? Partly the answer lies in the fact that China is trying to establish economic hegemony and as it acquires this debt, it is managing to gain access to cheaper resources as well in other countries along with ensuring that the exports go on as smoothly as possible. Resources now belong to Chinese governments in a number of countries like - African countries for timber and minerals and oars; quarries and steel mines in Australia so on and so forth.

However, the biggest worry from Chinese economic activity is something else and can have implications far worse than a simple default on sovereign debt from western countries and banks [that is a given and it is only a matter of time before it explodes] For the last 10 years, China has demonstrated remarkable progress in building up the infrastructure and a lot of modernization. Something has to pay for that as well - is it possible that China has actually utilized the holdings of these potentially toxic assets [western bonds] as collateral to borrow money for building up all of the modern facilities?

If that is the case then banks and investors are in a double whammy situation - in case of a demand for payments come in a jiffy, China can simply wash its hands off as the value of collateral is tied to Euro and US bonds! The infrastructure is in place now and all that China has to do is gain access to the remote control similar to that of US!. So if one thinks that China should be worried if the toxic assets of western world will affect China severely - it acually ma be the other way around. The very western world should be worried because China has managed to keep itself in a win-win situation; If the recovery of western debt and concerns go as expected, then China is fine with a lot of high yield debt in hand. The recovery will have no major impact for the western world as they have auctioned bonds at very high yields and low prices! On the other hand, if the western sovereign and banks fail, China will also stop payments citing challenges with the collateral security!

Think about this perspective as it will send down negative jitters across global bourses and in such a condition, the bear market conditions can extend for another 15 to 18 months!

Global Markets Update - 8th October 2011 - Special Coverage for Indian Banks

Nifty has managed to hold 4720 right now and critical support levels are in the 4663-4693-4720 zone for now. Banks and financials have regained some base after a massive short-covering rally and some easing of concerns over Euro-zone liquidity concerns. How far will this go ahead for supporting banks - only time should tell. LnT, BHEL have regained some lost ground and all auto stocks seem to be rebounding well courtesy expecations of higher sales for the festivity period.

IT is trying to regain some ground on the back of the rollar effect that is expected to boost the balance sheet. All this just indicates a temporary boost and will fail miserably to cheer the bourses. Short term upside momentum will be very very short-lived. Once all the major bad news gets factored and stocks get beaten down - we should see some fresh buying coming in from the mid-segment traders and end the year 2012 hopefully above the 5k mark. 16th Nov to 22nd Nov is the most bearish time period IMHO where will see a lot of panic on the bourses and extremely high VIX [39-30 levels or more - similar to the levels we saw during the post Lehman Brothers period]. We will not go below 3800 levels IMHO for the current fall and then start moving upwards.
Cash continues to be king and this is not the time to buy gold/silver as an investment. For now, I can say that one can start looking at Moser Baer, Navneet Publications, Clutch Auto, IFCI in a staggered format; 10% of capital can be deployed in times of current panic in the next 4 to 6 weeks with a target of 30% plus returns PA with a 3 year horizon.

Blue chips like Tata Motors, M&M, LnT etc need to wait for some more time till they get badgered further. Regardless of what happenes, IMHO, we are very much close to a bottom now and the 3800-4800 entire zone on Nifty presents good buying opportunitites directly into equities and Index units like Nifty Bees and BankBees [7800 - 8800 is the buy zone] and one may also consider Hang Seng Bees now [12k to 15k is the buy zone] and once can expect at least doubling the value of these Bees instruments within a 3 year time frame. No point fishing for a bottom - time is ripe to make some investments now.

Disclaimer / Disclosure: The counters mentioned here with levels are an estimate made by me and by no way represent a guarantee of returns. There could be further corrections as well and these suggestions are made with a 3 year time frame. An individual must consult a financial advisor before taking the plunge. I hold some of these stocks and have recommended these stocks to people in my private circle as well.

Profit or loss arising from any positions taken in the counters mentioned above is solely the individual's responsibility.

Global Markets Update - 8th October 2011

So - the much awaited loot of honest tax payers' money continues. BoE announces an asset purchase program and outgoing Jean-Claude Trichet announces that for a 12-13 month period, troubled banks will get as much help as possible to stave off the troubles as much as possible. This is exactly what the bankers wanted and managed to get it too - all that was needed was to trigger sell buttons en masse repeatedly and the central banks succumbed. As usual, known for things BIG, now President Obama, not wanting to be left behind urges the stakeholders to approve his 400+ billion dollar scheme [TARP was too little, Big Ben doing 2 rounds of QE was less - and now that Europe has joined the party for bailout, the US wants to make sure they don't lose the numero uno position - the numero uno position of beggars one must remember!]

So where does this lead too?

So far, things have not changed at all as far as stock markets of Europe are concerned. FTSE has support in the 4900 zone and till that holds, counter-trend rallies to 5200-5400 will keep coming. Those bullish on FTSE should only get some cheer if it stages 2 consecutive closes above 5550

For SMI and DAX, the 5000-5100 zone represents good support and to the extent these hold, we will see counter-trend bounces to 5600 [or perhaps 1 poke to 5700 levels as well]

As far as CAC40 and DAX are concerned - their targets are set firmly in place - 50% drop from the 2011 highs. CAC40 has completed half the journey. the remaining should be covered in another 6 to 8 months.

Dow still will continue to take support in the 10250-10500 levels and bounce back for a couple of instances. 2 consecutive closes above 11450 will open Dow for retest of 11875-12k levels on the upside. Transport and Banks have already confirmed the weakness. Retail is showing some positive divergence and if the earnings even come marginally close to the already revised analysts' expectations of less than 1 dollar EPS [in banking stocks] and the outlook looks better for banks based on recapitalization due to monetary liquidity, there may be some more brightness on Dow before it sinks.

Friday, October 7, 2011

EOD Analysis for 7th October and Outlook for 10th October 2011

So 1 furious gap-down's damage seems to have been reversed to some extent but let us not forget that all bulls are still badly badgered. Today's price action is simply akin to a patient with badly fractured limbs being shifted from ICU to the general ward!

Nevertheless - signals of an upside were seen during the closing hours of Wednesday itself when significant premiums returned to the Nifty futures and a lot of Put-Writing was on-going. OI through out the day was over 24 million [a marginally positive sign] for Nifty futures; Banknifty recouped a lot of losses but is still precariously placed with Banknifty futures hardly commanding any premium from normal 30-40 points. Moreover, SGX Nifty had a blast yesterday and with the monetary stimulus being pumped in by Europe [and Obama now pressurizing Congress to approve the 400+ billion jobs package] the markets are bound to be on a short term Euphoria but the subsequent fall will be worse.

Some negative divergence was seen on IT stocks like Infosys (made a day low of 2487 on spot) and TCS (made a day low of 1037) as well which is already hinting at caution. LnT had a technical bounce to the 1350-1400 zone as indicated earlier and the same has been achieved. How much further will it go to - time will tell; IDFC, Tata Motors showed some strong gains but they should see some profit booking next week yet again. The bigger picture is simple - we are in a very grim global market scenario and things don't look encouraging for some more time.

Hope you enjoyed the profits and the festive cheer. There are some more to come as we move along for a few days and then one big bang coming for November.

[Upside still stays capped at 5225 for now subject to a close above 4944-5032-5092 levels in consecutive fashion. On the downside, 4663-4693-4720 forms the support but if pounded repeatedly, it will give way.]

Wednesday, October 5, 2011

EOD Analysis for 5th October and Outlook for 6th October 2011

On the surface things looked calm for Nifty but there is a grave danger lurking around in the broader markets as well as the leading indicators. Banknifty continued its slide and took a cut of almost 250 points and is at precarious levels. Based on the previous outlook, the falls were expected to be arrested in the 8800 zone for now but the entire banking space across the globe is getting extremely messy. Whilst IT and some of the Auto majors saw some short-covering and modest upsides today, if banks go down and the seasonal demand does not match expectations, auto sector will be the first to take steep cuts. IT saw some short covering as well as possible bounce due to the rollar effect but that is not going to help.

Already the jobless claims in the western world are inching higher so there will be increased pressure to keep jobs locally and this will hurt the IT sector a lot. LnT, Reliance also held fort but it is only a matter of time before the sell button is hit en masse. The only positive takeaway from today's trade has been that the OI increased a bit for Nifty futures to about 23.4 million and significant premiums have been restored to both October and November series Nifty futures. Another thing to note is that the deeply ITM Puts like Oct 5200/5100 PEs were trading at discount and the lower strike PEs did not carry too much premium - maybe just maybe some some more upside may come before the eventual fall.

Crucial levels remain unchanged and upside still seems to be capped at 4840 levels for this week whilst the 4663-4693-4720 levels remain absolutely crucial. IMHO, 4773, a very crucial level has been pounded 3 times now and it no longer holds the importance as it did until yesterday; if bulls are lucky 2 more times it can support but I am not very optimistic any more about this [3 to 5 times is the number of instances such crucial levels hold the fort; we saw it with 5690, 5532, 5408, 5378, all the way down to 5092; after 3 pokes, there remains a lot of uncertainty as to whether subsequent supports will come through]

Any rise right now is illusory and is on account of short-covering rather than fresh longs. Only if the OI in Nifty futures surges to 30 million plus levels with a RISE, can one say fresh longs are entering the system. For a falling market, I personally have no reservations that the volumes will come with the fall and just in case they don't come through, it can only delay the fall but not avert it [it has already been seen most of the times in the last 3 months that a 30 point fall in Nifty triggers a 3-3.5 million increase in OI and accelerates the fall]. Fortunately, there was a slight decrease in VIX [though still above 35 levels] which also indicates some calm but the reason is straight forward - a vast majority of the retail trading section does not want to participate in the market.

Wishing all of you and your beloved family members a very Happy Dushera. May Lakshmi Devi and Saraswati Devi both shower their blessings on you for health, wealth and prosperity.

PS: Cash still remains king and hold on to it - and invest in only select counters on sharp dips in tranches. Once 4693 broken on downside, another floodgate to 4450-4550 coming in....

Tuesday, October 4, 2011

EOD Analysis for 4th October and Outlook for 5th October 2011

What a day? Absolute chaos and mayhem on the bourses. A slight gap-down on open, a confirmation to go down with a 15 minute candle with high of the bar below 4840 and then an apparent pullback only to fall in 1 straightline all the way from 4870 levels to sub 4750 levels and all subsequent relief not really suggesting anything meaningful - a tussle to tide over 4765 and then a tussle to tide over 4773 - a very critical level for Nifty.

Harshal bhai and I had pointed yesterday to the possibility of retesting 4773-4790 levels if we get a bar with high below 4840 and whilst that happened - the subsequent blood bath was certainly beyond what I anticipated for the day. Banknifty had melted almost 340 points at one point of the day [that makes it a 400 point fall from the high of the day!] and is well below critical support of 9k levels. The Greece drama is just a farce IMHO - what hot money is really trying to do is create panic and coerce central banks for another round of QE3. Chances are that it may come through but for now upside is capped at 4840 and even if we take today's extreme price action as a throw under, a throwover can give an upside towards 4944.

Bulls are almost for a complete ICU rest now and may manage to play some catch up if we get a close above 5032 levels. The upside for the next 2 trading sessions (Thursday being off) will only be a result of short covering rather than fresh longs. Absolutely no signs of retail traders coming back for longs as after a spook in VIX to 39 levels and Nifty's day low at 4735 levels and some pullback, OI in Nifty futures were under 23 million! The only way some participation can now come in is with short-covering and a short-covering session can come through tomorrow.

The minimum target for the downside is about 4450 and may show another panic fall but such steep falls may just hold back for a few more trading sessions. Hope readers managed to follow the advice given consistently in the blog for a winning propostion - wait for a meaningful rise and Sell on Rise - at appropriate levels.

The critical levels remain unchanged; a close below 4720 will accelerate the downside and also deepen the targets to the downside. Looking for a retest of 3800-4400 levels around 18th November '11 [critical week 16th Nov to 22nd Nov]

Monday, October 3, 2011

EOD Analysis for 3rd October and Outlook for 4th October 2011

Over the weekend, I had indicated potential weakness during the opening bell for Monday following weak global cues. However, I had estimated the falls to be arrested in the 4868 area [being the minimum level for the gap-up to be filled]. However, Nifty did drop lower and is taking support at the 4820-30 zone. 4816 is what works out as critical support in my calculation and hence expecting bouncebacks in the 4800-4820 zone for now. The OI in Nifty futures was just about 21 million today matching the outlook given towards expiry [when we saw OI go upto 35 million]

So where do we move from here? To the extent the 4800-4820 levels hold, we should be able to see 4880-4911-4944 by Wednesday IMHO and may go upto 5032 as well. The bull side will only get bolstered with a close above 5032 and then above 5092. All other critical levels remain unchanged. Banknifty's crucial support zone lies in the 9000-9250 for now and to the extent that holds out, we should be able to see some pull-back. In fact, it should not be surprising to see a sudden short-covering spree to come into Banknifty as the Banknifty futures of October series were trading at almost a 25 point discount towards the middle session of the day and some of them were trapped whilst tomorrow's session in all likelihood should trap the remaining shorts. The close towards 9200 from the lows of the day is a good sign [Adjusted close at 9185]

LnT is pretty much butchered at the moment keeping the negative divergence on the bourses intact. Expecting this counter to bounce back to 1350-1400 levels at least before going down. Eventual target is 1100 minimum to the downside by 3rd week of November. Today's bounceback from the lows of the day was commendable but some uncertainty on upside does prevail due to the high options premium on the 1350 Oct Call.

Another reason for anticipating some more upside before going down is that technically, the 3 swing bottoms of recent past have been going higher 4720-4760-4830 [and I concede that the tops have been lower as well from 5169 to 5140 all the way down] By the end of the day, Nifty Oct futures had some premium compared to the fact that they were trading at discount for most of the trading session today.

Please do take the counts from Raghuji's blog and Trendlines from Harshal bhai's blog for more refined levels as my levels and outlook generally stay at broader levels.