Tuesday, December 31, 2013

Outlook For January 2014 / Outlook For 2014

Well Nifty has broken the jinx in 2013 by posting a new high [albeit for a few moments] and kept its head well above water. This was certainly not expected and a sharp fall was anticipated in 2013 as long as Nifty stayed below 6338. Global indices were on a roll in 2014 with European and US markets outperforming Asian markets big time. There will be many bears who will still say that these rallies are narrow with only a select stocks taking indices higher etc etc etc. What is important nevertheless is that indices have moved higher on the back of rampant money printing and this is exactly how things will pan out as long as QE continues.

On Nifty, the longer term bull case was 2 consecutive closes above 6280 that was satisfied in December '13. Some correction is likely in the next 3 months to about 5740 levels [5445 also possible] but this is healthy for the market. All such falls are excellent buying opportunities. The FMCG /Pharma / Consumer stocks defensive stories have played out their part. They may also rise further but no where close to the growth rates they had in the last 3 years. Now at best one can assume about 10% growth per annum in most of these stocks for the next 3 years or so. The cyclicals like capital goods, banks etc that will form the next major wave of growth for 2014. Midcaps are yet to perform and in all likelihood they will in 2014. 2014 is the year of elections and as I have been mentioning before, the markets do not care whether it is NDA or UPA at the helm. The latter half of 2013 have suffered from policy paralysis and this would have happened even if the opposition were in power. Post-elections, once there is certainty of a stable government, markets are expected to roar. The only spoke in the wheel is a third front that hot money won't like and that seems very unlikely for 2014. Post elections, the currency space can be expected to appreciate significantly and take Rupee-Dollar back to sub-50 levels by end-2014. DEFTY that has kept FIIs languishing will finally surge up IMHO and things should be on a song. Getting a year-end target is difficult but during the year, 6700-6800 is something that Nifty should be able to achieve in the 2nd half of this year. The next logical target is 7200 but markets don't move in one direction all the time. One must keep expectations normal but 7200 is something that we will see on upside in the next 3 years and 4900 is expected on downside once.

The point to remember is that unless Black Swan events like wars, economic crisis beyond normal limits etc take place, 2014-Oct'16 is a strong bull market for India. Every fall is a buying opportunity on indices like Nifty and BankNifty. The greater the fall, the greater the buying opportunity. So keep that cash ready to beat inflation. Ignore the noise regarding NPAs and Credit Restructuring with banks. It is well known to all market players right now and although fundamentally bad, the government banks will be recapitalized time and again. Stick to large-cap banks like Axis, SBI and ICICI and ideally go for SIPs in these scrips. The SIP mode will ensure that you get at least 25% PA returns on the overall corpus over the next 2.5 years. Other investing opportunities will be updated as and when they come through.

Be very wary of the IPOs that come through in 2014. The success of Just Dial is a pre-cursor by hot money to entice retail investors and tell them that the IPO success platform is back in India. Historical data suggests that over 95% of IPOs spell doom for retail investors in the long run. Sometimes it pays off better to stay on the road frequently travelled i.e. regular scrips like LT, NiftyBees, BankBees and ideally on SIP basis. For the Midcaps, go for index linked ETFs like M100 and JuniorBees. On the investment front, ignore short-term volatility. Since 2008, a lot of investors have been vary because the Nifty was in corrective mode. Post elections 2014, the story is expected to be much different and this is a once in a lifetime opportunity on Indian bourses. This is an opportunity one should not miss as an SIP portfolio of NiftyBees, BankBees, JuniorBees, LT, SBI, Axis Bank and ICICI Bank put together will yield a minimum 25% return per annum over the next 2.5 years.

Before moving further, let me zoom in to outlook for January 2014 specifically.
Here are the charts as on 27th Dec '14

Nifty Daily

Nifty Weekly
BankNifty Daily
BankNifty Weekly

From the week starting 6th Jan '14, the trend should get clearer. In all likelihood, price action is expected to be similar to that of Jan '12 though in lower proportion [that rally had started from 4531 whilst half of the current rally is already done IMHO] Critical time period are the 8-10 days after Makar Sankranti i.e. 15th Jan '14 onwards.

Critical Levels
Daily - 6280
Weekly - 6180
Monthly - 5970

So as long as Nifty manages to close above 5970 on 31st Jan '14, the uptrend remains intact. For traders, the daily/weekly levels are more significant and should change positions accordingly. If 6280 is breached on daily basis, it just means trim long positions. Short-term shorts should only be initiated after 6180 is breached on weekly basis.

Markets have been testing traders' patience for almost 2 months now and option prices have been absolutely crazy. One should avoid options for now and only use them as hedges for their futures' positions. The large moves either up or down should come through in the next 3-4 weeks.

Going back to 2014, the outlook for stocks has been spelt out clearly. The real estate market may take a short-term hit but the stage seems ripe for a royal upside in the property market. The pre-cursor to that is the introduction of Mortgage Backed Securities and the launch by IIFL is just the beginning. There will be many more coming in 2014.

Gold and Silver will slowly crawl back and by mid-2015 reach old highs. Oil prices will continue to be stubbornly up and petrol prices in all likelihood cross the 3 figure mark by end of 2014. [The gain in rupee currency will be offset by price rise in dollar terms. Moreover, with so many subsidies to take care of, petrol is the most logical target for the government to recover tax revenues]

The MCX debacle not withstanding, commodity trading will continue to soar in all likelihood through the NCDEX platform.

On the global markets front, 10% to 15% correction is likely but that again is very healthy and logical. Except for the Black Swan events, Nifty will run its own course this year and it may not be prudent to extrapolate western markets and anticipate movements on Nifty.

So once again, wishing all of you a very prosperous New Year 2014.

Monday, December 2, 2013

Outlook For December 2013

So we are the last month of 2013. Nifty has remained above the 5944 mark after opening the year at 6000+ levels. One part of the jinx has been no new highs in a year when Nifty opens above 6000 in the January of that year. So far, that jinx has held. The other part has been a bad 4th quarter of the calendar year is usually bad. That hasn't happened yet. December will tell us the whether history will repeat itself or the jinx will be broken.

From the technicals perspective, as long as 5944 holds on weekly basis, no major down moves seen. As far as 5810 holds on monthly basis, no major down moves seen. Daily levels will keep changing [currently in the 6080-6125 zone] That Nifty is headed for new highs is a given because the condition of 2 consecutive closes above 6280 has been satisfied. Only factor is the election results and hence new highs may wait till that is out of the way. On the other hand, falls upto 5445 will be considered routine corrections / profit booking and such moves are healthy for the market.

Since the technical part is being discussed, I will also post the Nifty and BankNifty Charts

Nifty Daily

Nifty Weekly

BankNifty Daily

BankNifty Weekly

For a severe downfall that was expected, it can only be now triggered by Black Swan events like the Lehman Brothers episode in 2008. Right now, the most probable events come from German politics or the banking system of Denmark [where personal debt levels are above 350% of current networth] This is the highest in quantum and percentage for any country in the last 300 years on 'personal' indebtedness. The problem is very grave because the country has a small population of under 6 million people and the quantum is significant. Or it could be a war in the middle east whatever - as the name suggests, these events are Black Swan events. It is difficult to predict them because they come at random.

Assuming normal conditions, capital markets will continue to maintain upward bias as long as money printing takes place. From an Indian perspective, too much upside seems difficult with stubborn inflation and weak currency. Hence the elections are important from this perspective as well.

In terms of timing, the 10-12 days with 21st Dec '13[Winter Solstice] as the pivot will be good for traders. Markets will in all likelihood give a good 200-300 point move in either direction around this point of time. The RBI policy will see some knee jerk reactions in either direction but it is difficult for RBI to be very dovish at this point of time. My personal take is that we may see repo rates unchanged [for growth] and perhaps a CRR cut for liquidity that senor Raghuram Rajan has not done so far.

From the social perspective, the great expansion of central banks balance sheets into trillions of dollars/euros/pounds/yen are feeding the next crisis. There is no doubt about the fact that the banking and financial industry will trigger the next crisis. However, since 2013 did not trigger such an event [with Oct '87 and Oct '08 in hindsight], this event is perhaps now due around Oct '16

Why am I certain about such a thing happening

It took almost 2 years before the 1987 crash for the bubble to be fully set to be burst. Then came the tech boom. There was a lot of mania for dotcoms before the crash actually happened. The dotcom / tech mania is here for one and all to see. People tend to forget that IT is a critical factor for business today but IT is in reality an enabler. In the last run-up for the IT crash, technology was so rudimentary that people had to be hired to generate HTML syntax codes. Over a period of time, software was developed for the same and pure HTML coders had to find something new. Again, I reiterate that IT is a critical enabler. However, real business and economy still grows on the basis of brick and mortar businesses and jobs. Yesterday's game changing technology will become today's dud. One also must remember that there is no perpetual growth. I am all for technology but simply cannot forget the fact that a tech mania wrecks havoc on economies. Compounding to this fact is that for 1 successful Google or Linked In, there are 250-300 failures.

The other part that fascinates me is that the sector that has boomed in financial markets ends up being on television the most. At equity market highs earlier, we used to see most advertisements from the banking and financial services segment [relative to the proportion of other advertisements] This time around, most of the prime time advertisements are coming from the defensive segments like FMCG, Pharma [moving more towards generics] and food industry. Exploding marketing campaign budgets are suggesting that something is drastically wrong in the system right now. Nevertheless, the fact of the matter is Indian markets are headed for new highs in the next 18 months or so after the elections IMHO. Use declines as opportunities to buy.

This is really not the time to go short; this is a time to go long on the index and do a sectoral churn in the individual stocks in holdings. IT, Automobiles and Defensives have done most of what they could do. They may not fall much but the potential to go significantly higher from current levels is unlikely. The grossly beaten down counters like capital goods, banking [large-cap banks like SBI, Axis and ICICI], metals like Hindalco have more potential to grow now. [One may go through my posts since August where I have given the list of stocks with Buy zones] On the mid-cap funds, it is very difficult to pick winning contenders without insider information [and I don't have any access to such information :(] The next rally will see mid-caps picking up as well and one may buy into ETFs specifically related to midcaps like M100 or Junior Bees that derive value from the index.

So let us hope that there are no significant down moves in Dec '13 and we all manage to enjoy Xmas '13 and welcome 2014 with great cheer.

Sunday, November 24, 2013

Credit Growth and Debt Slaves in India

As we come closer to elections and protracted slowdown in banks, there are a lot of advertisements by banks regarding easy credit [personal loans, home loans and credit cards]. If you see carefully, most ads are focused on home loans. Why is there so much emphasis on home loans???

First, the realty sector is in shambles with excess inventory yet high prices fueled by black money. One must remember that projects in the realty sector get limbs by virtue of bank finance. So if the sales slow down, they are not in a position to repay banks. Banks have a vested interest to entice loans in this segment so that their repayment cycle comes back on track from the developer's side.

Second, a home is a priced possession for any human being. A person may delay purchase of a car but buying own home is a top priority. This ensures that the EMIs are paid on time thereby securing credit growth. Most important is that if one services a home loan exactly as per 15-20 year tenure, the interest component is actually larger than the principal availed by the owner and interest income is bread and butter for a bank. All said and done, the property is hypothecated with the bank till the loan principal is paid back.

So far, I have just mentioned the interests of the builders and banks to promote the home loan portfolio. Now comes pricing of homes that are astronomical by logical standards. India has a GDP per capita of about USD 10000 for urban population [about USD 3000 on a pan-country basis] So the spend on home loan EMIs is about 40% of per capita income i.e. one of the highest in the world. In developed economies, the GDP / Capita is about USD 45000 and the spend on home loan mortgages is about 10% to 15%. Thus, it is clearly evident that the home prices in India are obnoxious and since they are purchased on credit, a person will slog day in and day out to ensure that the home loan portfolio is serviced.

The government and the banks are very happy with this kind of scenario. As long as the sword of EMI is hanging on a person's head, s/he will not think about other things. S/he will be indifferent to misdeeds of the government and government policies as s/he has better things to worry about in personal life. This person also starts becoming less creative or rebellious at the workplace. The person wants the cushion of safety of a salary credit at the end of the month. It is this salary that will ensure that loans are serviced on time.

So the person does not question the government, does not question the corporation and leaves his/her independent views and creativity apart. What does all this lead the person to become? A slave albeit a debt slave. We are living in a democracy and hence it is not possible to chain human beings and make them direct slaves of the government and corporation. So what is the best way to control and make people slaves in the larger scheme of things? Make them debt slaves.

This is the sheer business that the government and corporates want to ensure in India. Keep the poor poor and ensure votebanks via subsidies and sops. Make the super-rich ultra-rich by keeping hopes and aspirations alive with the middle class population. And ensure that the middle class is reeling under EMIs for most part of their lives to service EMIs.

Bottom-line: Debt is modern slavery. There was a flop Hindi movie a few years ago but the message in that movie was great. An aged person says 'Pehle log zaroorat ke hisaab se karz lete the; ab karz ke hisab se zaroorat bana lete hain' Coming back to market perspectives that I usually comment upon; as investors, we try to shun away from corporations that have huge debts on their books. We like to invest in companies that are as debt free as possible. Does this not also apply to our personal lives?

I am not against availing loans. The salary levels and price levels for most of the essential goods and services in India mandate us from taking on loans to take possession of the same. I have availed loans myself at various points in life and am sure at some point of time in future, will have to avail loans again if need arises. The point Im trying to drive is that availing debt and taking possession of goods and services gives a momentary high. In the long run, it hurts our capabilities to think independently and be creative. It automatically ensures that we become systemic slaves [political system and banking system].

So one should be prudent whilst availing credit and one should be quickly servicing debt to ensure that one moves out of the debt spiral as soon as possible. We all like to talk about the Sovereign Debt issues in Europe, US etc but most of us forget that we are individual equivalents of Greece, Spain, Portugal etc that tend to borrow far too much failing to realize that we don't have the luxury as individuals to default on our loans. Default would simply mean losing our homes, cars etc. The Kingfishers and Saharas can go on forever doing what they want and yet retain a lavish lifestyle and avoid jails. The common man cannot. So think prudently when taking on credit and act wisely to clear off debts as soon as possible.

Otherwise, one will be slave forever to the system [this is what our leaders want us to be for their vested interests] And as long as debt slaves exist, systemic changes for the better will not be possible. We can say along with chai with our friends 'Iss desh ka kuch nahi hoga; sarkar bekaar hai' etc etc We need to be the change that we want to see. If charity begins at home, change begins with us on a personal level. Let us try to ensure that we get out of the debt spirals as soon as possible so that we can then think through things and catalyse the process of change India needs desperately.

Monday, November 11, 2013

Updates on Long Term Investments / Additional Recommendations

Well leaving apart short term fluctuations, I think this is a good time to review where my longer term investment picks stand as on date [over the last 3 months].

NiftyBees: Buy Call given when value slips below 550 CMP 619 +12.5%

BankBees: Buy Call given when value slips below 900 CMP: 1092 +21.3%

SBI: Buy Call given when value slips below 1850 CMP: 1725 -9.3%

LT: Buy Call given when value slips below 800 CMP: 940 +17.5%

JP Associates: Buy Call given when value slips below 55 CMP: SL Triggered @ 45 -18%

Tata Steel: Buy Call given in the 200-270 zone CMP 360 +50%

On balance, the portfolio is still in green territory and I would still encourage holding the ones in green some more updates

SBI - Still maintain a Buy on Dips on this counter and over a 2-3 year period, this counter is expected to test 2550-2750 levels

JP Associates: Avoid this stock completely

Hindalco: Recommend Buying in the 70-95 zone for target 160+ with SL: 55

ITC: Recommend Buying in the 240-275 zone for target 375+ with SL: 200

Fixed Income
Today's impact on Bond Yields has weakened the NAVs of Debt Funds and FMPs

One should make use of the same and park some funds in this segment. Post elections, the yields will soften and the NAVs of debt funds will be much higher. Debt funds are expected to deliver about 14% returns over the next 18 months by virtue of rationalization of yields on bond yields [G-Secs and AAA segments only]

So go ahead and make use of the opportunities for good returns :D

Friday, November 1, 2013

Outlook For November 2013

So Nifty has defied gravity and fundamentals. October series started with the outlook as Daily = Bullish, Weekly = Bullish and Monthly = Bearish. A monthly close below 5803 would have kept the monthly trend as bearish.

For November series the values are as follows

Daily = Bullish and only EOD below 6125 can change that

Weekly = Bullish and only EOW below 5944 can change that

Monthly = Bullish and only EOM below 5850 can change that

Where do we go from here? Let us review the charts first

Nifty EOD

Nifty EOW
BankNifty EOD
BankNifty EOW

Current Nifty price levels are no way close to a secular bull market; in the previous instances when Nifty came to 6200-6300 levels, BankNifty used to be 12500+ levels; Capital Goods used to be at levels much higher than current levels. This time around its the IT pack and defensive pack leading from the front. So do I get aggressive with shorts - no way. During the recovery from 5118, I was with SL at 5740 and those were triggered long time ago. The price on the ticker is supreme and the same goes for DJIA, DAX etc. Just a few selected stocks are propelling the index higher and unless there is a proper reversal and as long as money printing by central banks continues, markets will edge higher whether we like it or not.

Coming back to Nifty, it is no doubt over-heated but should the prices take out 6357 [with 2 consecutive closes above 6280], Nifty may defy all sceptics like me as well and hit 6500-6600 levels. On the other hand, 6339-6357 levels are tested and the downward trajectory begins, it may be deja vu 2010-2011 again.

I won't hazard a guess at this stage and as mentioned earlier as well, I would prefer to switch gears depending on price action at the ticker. The levels to turn bearish have been given above on different time frames. [Daily 6125, Weekly 5944 and Monthly 5850]

The PCR on stocks are not showing excesses on the Put side for now; Implied Volatility has been dropping consistently for 6 weeks and hence a lot of premiums are being sucked out of both Calls and Puts. Regardless of where Nifty goes in November, IVs are expected to shoot higher and option prices rationalized by mid-November.

For the elections outcome in 2014 for India, there is a school of thought that the market is trying to price in the new government. I don't think that is the case. Right now, the only thing in the price is continuous QE from Fed, BoE, ECB and BoJ. It is very difficult to price in election outcomes for a market like India where the game ain't over till the coalations are stitched and somebody assumes power. When that will actually happen in India in 2014, we may expect a significant gap-up or gap-down regardless of where Nifty spot is at that point of time. Post elections, we may expect Rollar to appreciate significantly and go to sub-48.25 levels.

Other market updates
US indices are moving up courtesy QE. Just some small corrections post FOMC meeting are routine profit booking sessions. 15k+ is where it stands even after that. Only rising yields on Treasuries can reverse the situation. [and it is overdue for a correction]

Similar for DAX and FTSE. The Black Swan event of new German parliament has still not come through. There are serious backdoor negotiations taking place between Ms Merkel's CDU party and the SPD. Im still expecting a major suprise in Europe in the near future most likely from Germany or from Finland. But more on that when it actually happens.

These bull markets have been steady for almost 5.5 years now post-Lehman Brothers and have weathered the debt crisis of Europe thanks to rampant money printing. Once the bull market attains maturity, the growth and returns start flattening out.

Precious Metals: Some sideways movement can go through but IMHO the bottoms have been found. The dips must be bought into and most likely in about 18 months from now, we may see old highs being tested once again.

Crude will hover around the 70 - 100 dollars a barrel mark with most of the time towards the higher end of the range. For now, it is Diwali time and enjoy the upsides till they last.

So wishing all a very Happy Diwali and Prosperous New Year. As I keep saying always, views apart, follow the trend and prices on the ticker and you will be fine. 

Sunday, October 13, 2013

Vijay Dashami / Dushera - Mixed Bag of Emotions in 2013

So its the festive season of the year. We know as to why we call this day Vijay Dashami - its the day when Ram won over Ravan i.e. the victory of good over evil. Different parts of India have their own way of celebrations like Durga Puja by the Bengalis, Garba- Dandiya by Gujaratis, Navraatra by North Indians and worship of Saraswati by the South Indians. Many of today's kids only look forward to these days as days of 'Celebrations' by Cadburys and a Dressing Up / Down cum Dancing festivals!

Today, on the Dushera day of 2013, I'm having mixed feelings. On one side, hapy about the festivities, catching up with near and dear ones but on the other hand, sad about the super-cyclone Phailin affecting coastal Anshra and Odisha. We are barely 2 months away from the massive tragedy at Uttarakhand and now this. Fortunately, this time, we had enough warning in advance to be able to evacuate a large section of the potential areas but devastation will follow through nevertheless.

I had yesterday tweeted about how nature unfurls its fury in its own way. India, the land of reservations - can anybody in the Indian government or bureaucracy now have a word with Phailin? 52% reservation for SC/ST/OBC and minorties so please ensure that these people are not affected? Can Maoists fight back Phailin for their rights?

Nature has always been ruthless when it decides to unfurl its fury just as it is impartial whilst gifting us its natural resources. I sincerely hope that the damage from Phailin is less severe than the tragedy of Uttarakhand. If Vijay Dashami is victory of Good over Evil, then the verdict is very clear. We Indians have become rakshasas like Ravan ever hungry to exploit gifts of nature and monetize them. We end up fighting with each other and push things to the limit in pursuit of money, power and prestige. So from time to time, nature has to take some action and make us humble and realize how cunning and stupid we have become.

As much as I hope that both the government and people realize their mistakes, Im not that optimistic. Our governments and bureaucracy will take this as another grand opportunity to siphon of millions [perhaps billions] of tax payers' money meant for relief for the affected people. At the same time, the Telangana and Seemandhra issue will get more vociferous and a full scale political drama will unfurl.

We, the people can only do 3 things; first and foremost, realize that we are human beings much before we categorize ourselves as Hindus, Muslims and then into Kannadigas and Teluguites, Brahmins, Kshatriyas etc. Second, we the people need to objectively evaluate whether our constituency leaders are simply doing things to gain political mileage or are genuinely concerned about our well being and vote accordingly. Most important, we need to cultivate 'empathy' [not sympathy or apathy] for the affected people. Sympathy means we end up demeaning the affected people and try to unburden ourselves by merely donating cash and supplies. Apathy means we simply don't care as long as we are not affected [that is what is the attitude most contemporary Indians have] In 2013, we will have witnessed natural calamities affecting almost 20% of geographical terrain of India and the huge challenge of rebuilding lives [which can take at least 5 years]

First and foremost, our affected brethren need food, clothing and shelter. Our armed forces are doing their best within the limited resources they have. I hope corporates and people move forward to lending resources to ensure basic well-being. There will be a lot of logistical support needed for the same and we should take up a cue from our ASEAN leaders [both government and corporates] who ensured full support when the tsunami struck in Dec 2004.

So Happy Dushera to all of us lucky to have been saved from nature's wrath for now. Let us hope to convert ourselves into living in harmony with nature and weeding out the Ravans who are taking us for a royal ride at our own expense. 

Thursday, October 10, 2013

Importance of Evaluating Option Prices and Some Hyped Stocks

Well INFY results are around the corner and as usual a lot of traders are jostling up to build option straddles as for the last 10 quarters in a row, INFY results day has been eventful with a 10% Gap-Up / Gap-Down on open and then a follow-up with another 8% to 10% in the same direction for the subsequent 2 weeks.

Most traders want a quick-gun murugan trade with 100 points on the options straddle on open [and I have myself garnered that for 8 quarters in a row now ;)] However, What has intrigued me the most is the blind lapping up of these options by retail traders without going through the intricacies. Under normal circumstances, such things are fine but a lot of retail traders miss out on one critical point that is IV - Implied Volatility of the option. With retail traders queuing up like this, the Implied Volatility of Options shoots up big time and for the last 2 quarters, we have seen Implied Volatility of INFY options go as high as 80% to 90% a day prior to the results

What does this mean? With Implied Volatility shooting above 80%, one needs about 12% move in any single direction to BREAK-EVEN on the options spread cost. Only the move beyond 12% can yield some profits thereby making it a less meaningful trade. I suspect that the same thing is going to happen today by the end of the trading session and hence retail traders are advised to step aside on this trade. The best way to play the INFY result is to buy the options straddle well before the Implied Volatility shoots above 55% OR wait for the result play to take place and after option prices rationalize and then take a position accordingly.

For if one falls prey to buying the options with such high Implied Volatility, then you are only making the brokers and options writers richer. (I already have 2 lots of OTM INFY options straddles bought when the Implied Volatility was at 45% and if I manage to make 100 points on the spread when the IV goes high today, I will liquidate 1 lot today itself without waiting for the result!)

Other updates are related to some hyped up stocks and hyped up IPOs coming up

Just Dial: The stock is following the script of Educomp. The only saving grace is that retail traders are protected of getting their cost for 100 shares when the price goes on a tailspin provided that happens within 12 months of collapse [Educomp took 3 years to collapse 95% so expect the same time frame]

Jubilant Food: The stock is trading at over 65 times PE and this is not at all acceptable. Stocks like HUL, PnG, ITC trade at about 35 times PE and Asian Paints trades at about 42 times PE (Very high and over-valued actually) When the bubble will burst on Jubilant Food will burst I don't know but it will burst for sure. Indians consume far lower a share of pizza than other foods. Moreover, as the pizza space expands, you will have strong competition from Pizza Hut, Papa Jones, Smokin Joes etc so the market space will be crowded.

Jubilant Food at 30-35 times PE is still ok but definitely not at current levels.

MTEducare: Another Aptech / NIIT in the making and expect the stock to crash about 90% from CMP in 3 years time. PE is ok at about 24 times but a realistic valuation even in the recession proof education sector, the market space is crowded and anything beyond 8 or 10 times PE is over-valued.

Upcoming IPOs in the next 12 months
Aakaash - The training academy for JEE/NEET; expect an over-hyped IPO and price follow up but will meet with the same fate as that of NIIT/Aptech/MTEducare

Flipkart: Good e-tailing model and whilst it may soon cross revenues of USD 1 billion, profits in the e-tailing segment are less than 4% of turnover and they come with high expenses. Moreover, with Amazon Kindle and Google Playbooks crowding the e-commerce space with tablets and smartphones, the margins pressure on Flipkart will be high [Remember Subhiksha???]

The media will keep hyping up these stocks just as it did for Shree Renuka Sugars, Optocircuits, Delta Corp, Educomp, Gitanjali Gems, PC Jewellers etc and then at some point of time [after 80% crash] say that these are dead stocks and one should not look at them!

As retail investors, one should avoid these hyped counters as they 'seem' lucrative in the short term but in the long run, ruin investors. Whilst returns might be average market returns, one should stick to the indices and some time tested stocks and always invest in tranches.

A few days from now, we will either see a repeat of the crash of stocks OR a break-out [2 consecutive closes above 6280 on Nifty spot] So just wait for the crash or the breakout and then enter.

Saturday, October 5, 2013

The Futility of State Creation in India - Political Stunt At Best

I reckon most of us Indians have decided to mentally age backwards as time progresses forward. If we look around the globe, most governments are doing their best to make border controls minimal to facilitate easy movement of people and more importantly easy transmission of goods and services. Minimal barriers reduce taxation and administration burdens and make businesses, governance more effective and in turn results in well-being of people.

These were some of the basic tenets that the newly independent India also decided to implement in the nation. Just free from over 15 decades of foreign rule and knowing extremely well how the West was so easily able to use Divide and Rule policies with so many regional borders and kingdom, the mindset was absolutely correct. Of course the implementation was not extremely effective because the basis to divide the states was decided on the basis of linguistic differences.

We must understand the point that for the 7th largest nation by area and one of the most populated countries, it is always a matter of taking a few tough choices. By continuously creating more and more states, our politicians are simply creating more and more tensions and increasing costs to the common man. First, there was division to create Chattisgarh, Uttarakhand, Jharkhand and UP. Now politicians are playing the Telangana and Seemandhra card.

If things go through then Gorkhaland, Vidarbha, Khalistan will be the next issues and one cannot help question the government what exactly are you trying to achieve? More states means more and more administrative burdens to be created - first and foremost. Right from municipalities to police to taxmen etc. Then comes drawing up the borders and disagreements related to that. [We have so many times seen the issue of Belgaum, Nippani etc being taken up; ask anybody be it Marathi speaking or Kannada speaking person they will say they did not really care. If anything, they rued the fact that so much damage to property was done and productivity went for a toss] In due course of time, we will perhaps have a demand in Karnataka for separate North and South Karnataka. In Tamil Nadu, there might be a demand to divide the state on the basis of coastal belt and Brahmin belts.

Then suddenly, the erstwhile zamindaars and royal families will realize that they can have their provinces again. it is simply an endless vicious circle. On the one hand we hate it when Moody's and SnPs and Fitch downgrades our country's debt outlook [There is enough empirical evidence to suggest that interest rates beyond 6% on sovereign debt are never sustainable!] We are already reeling from a severe fiscal deficit, Current Account Deficit and double digit CPI inflation.

Look at most government offices / PSUs; the 'Salaries and Pensions' are way beyond 55% of Fixed Expenses in most segments [even in the corporate world with high salary allocations and perquisites, above 45% is deemed unsustainable] With 7th Pay commission and beyond, we are not far away from PSU Salaries and Pensions comprising over 65% of Fixed Expenses! The common man pays for this through high taxes, more instances of graft and double digit inflation.

With more and more state border issues coming up, there will be more contributions to be made for administrative staff. More corruption and exponentially higher instances of graft. The governments are yet to implement a uniform VAT/GST regime and completely do away with CENVAT and Local Levies. The due date for 'Implementation IN FULL' was in FY10. We are in FY14 and no where close to a resolution. I really doubt whether this resolution can get through before FY16. Now with more borders in place, one can comfortably add some more chunks of 2% each time a state border is crossed.

Then there will be teething problems and state level debt has to be issued so that the newly formed state can manage to get some limbs in place. Already existing states have given up on Food Security Bill and confirmed that they want the Central Government to foot the bill. States like West Bengal have been asking for re-organization of debt and these new state creations will further drag the budgets.

To summarize, there are neither economic gains nor administrative conveniences coming out of new state creations. We have already set wrong precedents and things will only get worse as more borders are drawn out. This is a political stunt for votes and the common man will suffer tremendously. Our leaders have to answer some tough questions one the same and I sincerely hope that the voters will force the leaders to change that.

Saturday, September 28, 2013

Outlook For October 2013

So, some excitement did come through after 22nd September, Fall Equinox. The German election result as of now seems a non-event. I have made one update and when I discuss Global Markets, will cover them more later in this post.

Coming to Nifty and BankNifty, let us first review the charts

Critical Levels as follows

As long as Weekly prices are above 5740, bulls can spring a surprise.
The most important level to watch out for is 5803 [+/- 15 points] on EOD 30th September. Holding 5803, the bearish possibility on Nifty gets delayed further. To call a 'Bull Market Breakout', 2 consecutive closes above 6280 are needed.

As I keep saying every month, so far we have never had a 'secular bull market' in India with Rollar above 48.25. Also Nifty so far has a jinx that when it opens in January above 6000 levels, it tanks to lows in the Oct-Dec period of that year (2008, 2011). Whenever we have had Nifty options in steps of 50, it has done badly for that year (2008).

The overall bearish conditions are satisfied but as my shorts in Sep got stopped out at 5740, I would not encourage fresh shorting till 5740 is breached on downside (Once bitten, twice shy). Many a time, people think that Not Bearish = Bullish and Not Bullish = Bearish as far as my outlook is concerned. I don't know about others but as far as Im concerned, my outlook goes Bullish - Neutral - Bearish - Neutral - Bullish. The 2nd part one has to bear in mind is the timeframe. As all seniors in the market will advocate, the higher timeframe view has more prominence than the lower timeframe view. The way prices are poised right now, this is my outlook

Daily Timeframe: Bullish till EOD > 5810 [This is to decide on taking a position for the next day]

Weekly Timeframe: Bullish till EOW > 5740 [This is decide a positional trade with 8-10 day horizon and reviewed every Friday]

Monthly Timeframe: Bearish till EOM < 5803 [This is to decide a positional trade with 4 weeks to 6 weeks horizon and reviewed on the last trading day of each calendar month, not expiry!]

To summarize, I could be bearish on daily basis but bullish on weekly basis and super-bearish on monthly basis. And not just me, any person with reasonable analytical skills will say the same. And also the fact that we have to be nimble footed and adhere to our SLs should the trade go against us and wait for the next signal to come. ('Itching' to take a position is trading suicide; discipline and patience is the key)

The levels are clear - so let us wait for Nifty to give the signal on 30th Sep '13. The preferred Bearish Count is still alive and I acknowledged missing out one crucial part in the EW analysis. The previous fall to 5118 was a 3 wave fall and hence a deep retracement was highly plausible. As long as prices are below 6225, the preferred bearish count is alive. Above 6225, that count goes out of the window for sure. The preferred alt 1 is already negated.

So there are only 2 plausible counts remaining

Bearish: 1 leg of fall pending on Nifty [1000+ points odd from CMP]
Alert Signal for INVALIDATION: Prices going above 6225
COMPLETE INVALIDATION: 2 consecutive closes above 6280

Bullish: Correction done at 5118 and new bull market has started
Alert Signal for INVALIDATION: Prices going below 5408
COMPLETE INVALIDATION: 2 consecutive closes below 5280

As I have also been mentioning regardless of where Nifty goes this year, next year is expected to be super-bullish after elections. So falls in 2013 must be used for accumulation. Preferred picks are NiftyBees, BankBees from the index based units; LT, SBIN, ITC, Tata Steel from the core index counters [Levels have already been given in previous posts] The index linked units ensure natural diversification of portfolio.
(Disclosure: Barring ITC and Tata Steel, I have long positions myself in other counters)

As of now Im Long Equities - Nil FnO. Long/Short FnO positions to be created after break-out / break-down signals emerge and will be updated on Twitter @NiftyParadox (Top left side of the blog)

Why things look super-bullish for India in 2014

Post-election results, most often than not have resulted in euphoria as the new government tries to scale down barriers for businesses and boost the economy. On a social mood phenomenon, India is at the cusp of an economic revolution just like the US was in 1980 [the roaring 80s as they called it]

During that time, the bond markets opened up big time, equities were soaring, the Dow made record highs. From a social mood perspective, the Billboard Chart Boards came up, more people started enjoying jazz, operas etc and the media space boomed. Fashion took new contours and there was a remarkable wave of freshness, cookery shows came up etc etc etc. Now just take a step back and see what is happening in India. Masterchef has gained importance, food is being looked upon as a lucrative business option, the colors in media be it films or television are all picking steam. Music has so many avenues and we have our own versions of Indian Idol, Sa Re Ga Ma etc etc etc. India's Best Dramebaaz, Dance India etc have gained significant momentum. Alternative cinemas are being embraced upon, people are becoming more fashion conscious and willing to experiment. People have become more open as far as relationships are concerned.

Social media has exploded and politicians are getting good stick for their foot in mouth diseases and customers are very punishing towards bad service be it from public sector or private sector. In Mumbai, open up the Mumbai Mirror and there are so many plays that are being patronized. 10 years ago, even a renowned theatre like Prithvi had to struggle to ensure adequate audience for plays. Only Gujarati plays, that too from a select audience used to get adequate patrons. Now, patronizing plays, music concerts is no big deal. More and more people are embracing them and these social indicators are very powerful signals. This India is changing for the better in many ways [and for the worse in many ways]

So the way I personally look at it, what US, UK witnessed in the roaring 80s, India will start witnessing post-election 2014. Also note the emphasis on 1980; [2014 = 1980 + 34; 34 is a Fibonacci Number] With so many different forms of analyses leading towards 2014, Im super-bullish as far as 2014 is concerned, post-elections of course. The downside of that is hyper-inflation and don't read too much into what Raghuram Rajan is doing now. He is carefully preparing his ground for Desi QE post-elections 2014.

Global Markets:

US: Don't read too much into the fiscal deficit debate in the senate. The US knows only one thing that is QE. They will continue to spend, continue to raise the debt ceiling and continue QE for as long as possible and as high a quantum as possible - period. They are now waiting to see the next Euro policy. Should the Euro-bailout move out, forget QE tapering, they will increase QE. Same is the case with the debt ceiling. If the debt ceiling is raised, then forget QE tapering, more QE will follow!
Republicans are fighting Democrats but remember which party created the Housing Mortgage Credit Crisis?
George Bush Jr + Allan Greenspan

The 2nd term of a US President has almost always been a disaster.

Germany: Merkel's key ally for Euro-bailouts has been ousted. The SPD whilst not anti-bailouts, is not pro-bailouts either. They want benefits of Euro bailouts to benefit common German people. This is a real problem in Germany because although the DAX is roaring, Germany's pro-Euro policy has helped German businesses and politicians. The common man is still struggling. Don't read too much into the fact that Merkel is coming back to power and she says that her Euro policy will continue as usual. With the new coalation partner and more resistance from Finland, Germany will pull the plug sooner than later on Euro-bailouts. The political landscape in Germany has changed drastically. We will see the results of the same in the next 6 weeks or so. The 3rd term for a German Chancellor has always been a disaster.

UK: Everybody is worried about the housing market bubble as jobs have not picked up. This entirely is the result of BoE 'Funding For Lending' QE policy. They have elections lined up in end 2014 or early 2015. So the bubble will continue but stocks will be under pressure as we run up close to the elections. (And remember that these are not new housing starts but erstwhile distressed properties that are being acquired)

Gold / Silver: They seem to have found their bottoms in dollar terms and will eventually turn up generating about 10% returns per annum

Crude: One fall towards USD 65-70 per barrel pending but prices will hover around the USD 100 per barrel mark with so much of QE happening all over.

Just a last note on Nifty; just as it happened in 2009, it will ignore bad news from the West and continue to soar higher. Expecting bumper new highs by Diwali 2014 on Sensex, Nifty, Gold, Silver et al

Yours Sincerely...........................Short-Term Bearish Long-Term Bullish Indian Analyst

Monday, September 23, 2013

Market Updates Post-German Elections / Opportunities for Nifty Traders

So as of the latest count, Angie Merkel and her party won the clear majority as of last count last night. The downside is that the current coalition has gone for a toss and a new one has to come into play. It will be a good 8 weeks before the final government and manifestos are in place. First of all, let us look at some of the basics

European political history suggests that only few leaders so far in major economies have got a 3rd term in office over the last few decades. Margaret Thatcher from the UK, Konrad Adenauer and Helmut Kohl from Germany have had the honors. History suggests that the last terms for all these leaders have been chequered. [And same has been the case for US Presidents in their 2nd terms]

The Euro has shot up marginally post the event and was one of the largest gainers after US Fed announced the holding back of tapering for the time being. 

Markets are so far celebrating the 3rd term of Merkel in anticipation that her aim of keeping the Euro intact will continue. What a vast majority of people have not factored is that fact that although Merkel has been talking about saving the currency, her underlying aim is to save Germany. By helping out PIIGS, Merkel has ensured near-zero borrowing costs for Germany and the DAX has been roaring because Merkel has ensured that a large part of the bail-out money is funneled back into the German economy. This is hardly surprising because Germany is highly dependent on exports be it international or intra-Europe.

What a lot of people are lot factoring in is the fragile condition of European economy as a whole. We know where the PIIGS stand. UK, barring the housing bubble and a few tech start-ups has not been able to revive the job market. It is instead busy creating the next sub-prime housing bubble [and the process has just started. Will take at least 3 more years for this bubble to burst]
The Danish economy has gone for a tailspin with average debt levels at over 350% of an individual's networth. The housing market is deep under-water and the government has had to overhaul the mortgage system to an 'interest-only' mechanism until further signs of improvising [another indirect QE and ensuring that people are under debt]

To summarize the situation in Europe, the risk that an immediate threat of some form of Euro-zone exit [either by Germany or by booting out some member] is averted for now. Bulls will be happy with that. Turbulence will continue for another 10-12 weeks. IMHO, there are some major surprises from Europe still pending and in all likelihood will still end up coming from Germany or Finland over the next few weeks!

On the other hand, the annual drama about fiscal debt and the debt ceiling started again in the US. Obamacare is being pushed back and the Republicans are trying hard to scuttle the Democrats' path of QE forever. Even that is an anti-incumbency sham because the Republicans also engaged in similar tactics. The turbulence on a day to day scale may seem funny but the bottom-line is that US is credit-addicted so no change expected from there.

How does all this pan out for India? With high dependence on FII inflows, Nifty tends to react almost everyday with either a boom phase or an absolute gloom face. The next 3 days of price action can almost entirely be ignored due to expiry week. However, I must caution the bears about Nifty closing above 6225 and more importantly above 6280. These are 2 very crucial levels and hence I have been reiterating that one should not jump to shorts till a firm close below 5740 is in place. Whilst on the upside if those 2 crucial levels are taken out, bulls will be on more rampage.

To recap on my earlier outlook I had given 3 levels on various time frames

EOD > 5445 is bullish and only a close below 5348 can signal reversal. This was the beginning of September and was taken out with conviction. Now that level has come down to 5944 on the daily time frame [Right now daily bias is bullish]

EOW < 5740 is bearish and a close above that will turn weekly signal to bullish. This has happened in the last 2 weeks and on a weekly time frame, this level stays intact. As long is Nifty is above 5740 on the weekly time frame, it is advantage bulls - period

EOM < 5803 is bearish and a close above that will turn monthly signal to bullish. This is the crucial level we have to look at when we evaluate closing price of 30th September 2013. The higher time frames have greater weightage and they tend to assert themselves unless the contrary price and volume action is strong.

On the EW front, my preferred count was looking at upside capped at abut 5944 levels and that went for a toss. I consulted a couple of experts on EW as to where my analysis went wrong and I got the answer from an expert master of EW in a precise concise manner. When the fall is a 3 wave fall, the subsequent rise is very steep. My mistake was that I was expecting an exact replica of Nov '10 to Dec '11 fall. Hence I expected a lower top on every rally. With this 'bias' I missed out on the crucial alternation rule of 3 wave fall-5 wave rise with deep retracements. Hence the emphasis now comes to 6225 and should that be taken out on closing basis [and more importantly 6280] then it is advantage bulls all the way.

I have always been an advocate of learning where analysis went wrong and also acknowledging my mistakes with the reasons and price levels. I was looking at shorting the rallies in Sep '13 with SL at 5740 and got stopped out [the twitter updates confirmed that as soon as it happened] Now people 'itching' to short still need to wait for prices to close below 5740 before initiating fresh shorts.

The critical Gann dates almost always bring large price swings in the 2 weeks around those dates. Yesterday was Fall Equinox. So lots of volatile price action expected in either direction. In fact these are good times from a trading perspective. It would be very prudent right now to build the following straddles

Oct 6200 Call with Oct 5800 Puts [or Nov 6300 Call with Nov 5700 Put] in ratio 1:1. Target exit points are +250 points from CMP or -250 points from CMP that will ensure that the gains remain 50 points per lot on the entire spread. SL would be when the combined premiums fall below 50% of premiums paid. Time frame: 8 to 10 trading sessions.

Uni-lateral positions [i.e. only long or only short] should be taken only after prices take out crucial levels. Closing above 6225, longs have higher risk reward outlook. Closing below 5740, shorts have higher risk reward outlook. Enjoy the volatility first on account of Nifty expiry and then on account of post-equinox effects!

Thursday, September 19, 2013

RBI Meet on 20th September - What To Expect - Desi QE Episode 1

So Uncle Ben decided to leave the QE untouched for now. Not the unexpected as I had warned in my outlook earlier this month i.e. US will continue with QE for as long as possible - period. Whilst many may argue for / against etc etc - markets have their own ways to make out what they want.

In a knee-jerk reaction, we may have global indices, commodities going on a roll leaving bears puzzled. As far as Nifty is concerned, the technicals remain unchanged as far as fundamentals are concerned, it is a different story all together.

Desi QE specialist, Raghuram Rajan holds his 1st RBI conference on 20th September and let us analyze what to expect. His debut was celebrated in style and his bold initiatives cheered. Inflation has shot up big time though currency stabilized by about 350 basis points. Now comes the Catch 22 situation from an Indian perspective.

Whilst the growth story demands that rates be cut, the latest developments make that a difficult option to take. Let us not forget that this meet is not just about interest rate decisions and CRR decisions but also about the guidance for the RBI. With new banking licenses set to be doled out and forex risks to be mitigated, the mainstream press and punters will be waiting with baited breath to take on senor Raghuram

Interest Rates: A rate cut is highly unlikely given the inflationary outlook and global liquidity. Thanks to US Fed, for now that part can wait

CRR: Expect a 25 basis points to 50 basis points cut in CRR to indirectly inject some liquidity

Currency Swaps: It will be interesting to see what is the guidance on this front. So far RBI has only announced swap measures with regards to USD-INR flows for the banks and OMCs. Luckily, Japan voluntarily came in and tripled the INR-JPY swap window to the tune of USD 50 billion equivalent this month (Point to note: Japan took lead in this step and not India!)

To save the rupee along with other EM currencies, it is very critical to have more partners on board for similar currency swap windows. With the recently concluded G-20 summit and BRICS discussion, it is very critical that at least with major trade partners like China, Thailand, Malaysia, Indonesia, South Africa, Russia etc to have INR-XYZ currency swaps that will be win-win situations on both sides. Unfortunately, it is highly unlikely as our central bankers seem to be happy with the fact that Iran accepts INR payments.

Moreover, politicians' vested interests lie in as many dollar transactions as possible!

Banking Licenses: This is one of the most absurd decisions seen ever. Rather than recapitalizing existing banks and moving towards consolidation (that will reduce a lot of fixed expenses and bring economies of scale) new banking licenses seem to be the flavor of the season.

Forward Guidance: Will be hawkish short-term and dovish long-term

As of now, the markets seem to have priced in a rate cut, CRR cut of about 50 bps. No QE tapering for now will keep rupee stable. So the upside on BankNifty maybe capped around the 10800-11000 mark.

3 major events were expected to rock the markets this week
1. US Fed Meeting: Uncle Ben gave markets reasons to celebrate
2. RBI Meet: Raghuram maybe hawkish and still get away with it for now
3. German Elections: Time will tell and as I have been repeatedly saying, this will be a potential game changer for global markets.

An interesting pair trade prior to RBI meet
Build a BankNifty Straddle with Oct 11200 Call and Oct 10200 Put with a combined cost of entry of about 250 per lot. Target Exit Points are 11000 or 10400 where in the pair will almost double. Keep a Stop Loss of 125 on combined value of the put and call.

Premium Invested: Apprx 250 x 25 = 6250
Maximum Loss: 125 x 25 = 3125
Potential Gain: 250 x 25 = 6250

Enjoy the new Desi QE version Episode 1

Sunday, September 8, 2013

Olympics 2020 in Tokyo - What a Shame

So we had 3 final contenders for the 2020 Olympics i.e. Turkey, Japan n Spain. End result was that Japan was chosen to be host. The decision to leave out Turkey is understandable - it is still an emerging nation and it won't be able to gear up to infrastructure requirements over the next 5 to 7 years - fair point.

What is incredible is that Japan was chosen over Spain and that is quite a disaster. There seems to be a marked pattern in the way venues are being chosen for such big ticket events. UK was chosen to host the previous round [because BoE keeps printing money] and now Japan [because BoJ has gotten aggressive with Abenomics] Even during the UK Olympics, one of the PIIGS would have been a good choice - it would help turn around at least 1 economy. However, UK prevailed. Lots of infrastructure developments done for the event and a few weeks later, most of these developments are biting the dust!

First of all, we need to understand the demographics and situation between Spain and Japan; Japan too is an economy struggling with stagflation but a large chunk of Japanese are senior citizens. Some of them are in such bad shape that they have to live in the outskirts of Tokyo in shady and dingy dormitories because there is both space crunch and high real estate cost in Tokyo. Japanese corporations have such high number of headcounts who are being stuffed into 'boring rooms' so that they eventually resign and leave.

On the other hand, Spain is a relatively younger economy with almost 25% of youth under the age of 25 unemployed. Spanish infrastructure is fantastic and they would rise to the occassion. The real estate prices in Spain have rationalized substantially and thus, this one single move of Spain hosting 2020 Olympics would have boosted Spanish economy. It would help Spain at least partially turn around the economy with minimal financial aid from ECB. A golden opportunity lost from Spain and Europe's perspective.

On the other hand, the highly inflated real estate prices in Japan will further fuel an asset bubble and most of the Japanese tax payers will further reel under pressure. BoJ will have to further print money to set the house in order and that IMHO is a criminal waste of economic resources.

As I said earlier, it is remarkably co-incidental that countries that are aggressively printing money are the ones that are getting access to such big ticket events [Brazil and Qatar also have big ticket events coming up. The property bubble in Brazil is already quite hot and once the FIFA and Olympics are done, they will be in bad shape as well; Qatar is on a set path to become the next Dubai but they have oil to bail them out]

To summarize, the world leaders are not in favour of economic prosperity of their citizens. All that they want to do is suck out the blood of tax payers and keep the rich where they are and keep the poor where they are. Japan Olympics 2020 will be short-term gain and long-term pain. Well done IOC!

Sunday, September 1, 2013

Outlook For September 2013 (Revised Counts)

Very volatile month indeed; as mentioned earlier, the current correction is similar to the one we witnessed in Nov'10 to Dec'11 period. We all know how choppy the markets have been in recent times on intra-day basis; the same was the case in the earlier period as well. Now, it is even more pronounced by virtue of the fact that institutional traders are allowed algorithmic trading. Whilst such moves create lot of fluctuations in intra-day basis, on EOD/EOW/EOM basis, prices do rationalize.

We know where we are - we want to know where we are headed - but let us review Nifty / BankNifty Daily/Weekly Charts first
As I have been harping that current correction is similar to Nov'10 to Dec'11 moves; I had also mentioned in http://niftyparadox.blogspot.in/2013/08/why-many-ew-counts-go-wrong-in-india.html this post about the broad moves in 2010-11 period

[Thanks to a couple of queries on the blog and Twitter, I realized that the previous count is INVALID as it tantamounts to an Expanded Flat. The current correction is a Double Zig-Zag similar to the Nov'10 to Dec'11 correction]. And since this is a larger degree count, it must be rectified asap as erring on this has serious ramifications]

Now we have done the following moves (Revised)

Preferred Count
A: 6225-5566-6125-5477-5477-5118
B: 5118-5*** [Can go upto 5944]
C: Pending

Preferred Alt1
A: 6225-5566-6125-5477
B: 5477-6125-5532-6093
C: 6093-5118-In play

The preferred count suggests that 2 large moves are pending; one on the upside and then a very deep downside correction. [2 consecutive closes below 5280 can confirm this]

The alternate count suggests that the pending upside move will be shallow [5740-5810] and the ensuing downside will also be shallow [4911-5032] [shallow relative to 5118]

The last alternative suggests that the correction is completely done with and the next up move has begun [2 consecutive closes above 6280 can confirm this]

My personal probability assignments are as follows
Preferred Count: 60%
Preferred Alt1: 35%
Alternate: 5%

Regardless of which one comes true, one point is very clear; index linked ETFs, and index heavy weights like LT, SBIN, Axis Bank, ICICI Bank, ITC are moving towards accumulation bands. The last leg of correction will perhaps take them down to about 15% from recent lows. The maximum damage will now come from the IT pack which is excessively valued. Just a 5% to 10% correction there is enough to generate 20% damage to Nifty.

For Nifty trades, the following timeframe wise levels are intact

Daily - Bullish for 2nd Sep '13 with EOD > 5445. Only a close below 5348 will resume downtrend
Weekly - Bearish and only EOW>5740 will bring bullishness
Monthly - Bearish and only EOM>5803 will bring bullishness

How should one approach the markets from here
On the investment front, dips should be bought into with a 2-3 year horizon. I have been updating my picks when prices come to accumulation point. As usual, I prefer to keep maximum exposure to the index itself than individual stocks. With a 2-3 year time horizon and target gains of 25% PA, Im willing to take a 10% to 15% hit in my equities portfolio.

So personally Im Long Equities and Short FnO as on date.

On the trading front, the big picture has been presented above and I keep posting on Twitter regularly regarding key levels. Personally, Im bearish till EOD/EOW<5740 but will shift gears if that condition goes through. Im not playing for the upside but using current rallies to build shorts via Oct Puts. I will be exiting all my Puts once EOD/EOW>5740 happens

For secure bull markets in India, we need Rollar to be at sub-48.25 levels. Whilst the current levels of 66-68 are extremely disturbing, there is empirical evidence to suggest that history is repeating itself. If you pull out the data for the last 25-30 years, pre-election years have seen rupee crashing by as much as 20%-25% and then rationalizing after election results. I think the same will happen yet again. There is a lot of sectoral churning that is taking place which usually is an indication of bear market rallies.

Critical Dates in Sep: 22nd Sep '13 i.e. Fall Equinox The 3 days prior to this date and subsequent to this date will bring large swings and alert traders stand to gain a lot here. This date also coincides with the elections in Germany that will be the real game changer. The majority is looking at US Fed tapering and the war on Syria - my personal view is that when all are looking at the most obvious points and views start converging at those points, they don't turn out to be game changers. The shockers will always come from the most unexpected places.

Whatever US Fed does, it does to prop up the USD or specifically demand and circulation of dollars. Whether its QE, whether its war or an internal recession - doesn't matter. With crude prices knocking 110/120 to the barrel, US has achieved what it wanted to achieve. QE will keep going until people dump the dollar - period.

Other Updates:
Gold and Silver have in all likelihood found bottoms in Rupee terms. In dollar terms too, that may have already happened. Boiling crude is a serious issue and IMHO, one more leg of fall is pending.

Not sure whether Dow has topped out but it is approaching some critical points and a 10%-15% correction is not ruled out.

FTSE, DAX, Stoxx 50 have all got a good 20% correction pending

As Keynes kept saying, 'Markets are irrational to the extent you are solvent' In real life, it simply means that markets will keep doing their own things and we need to act when our target buying/selling points come through. It is perfectly okay to have a view but when prices confirm otherwise, we have to junk our personal views and follow what the ticker is showing. The worst thing a trader/investor can do is 'look for what suits his/her view'; a sure shot recipe for disaster.

Happy Investing and Trading; last week of September should be exciting and Im eagerly looking forward to it. We have a lot of festivities lined up in 2nd half of 2013 and I hope all of you enjoy the same.

Wednesday, August 28, 2013

Buy Zones For Longer Term Investments - Part 3

Doomsday pundits will keep spreading the word of panic in markets as institutions are selling capital market asets and taking 'flight to safety' towards dollars; the main commentary from most 'experts' on channels was book out and hold on to cash; the very people who found stocks and valuations 'attractive' at 6000 levels do not see value now and would like retail investors to hold on to cash.

Fact is that although some more corrections are expected in Nifty / BankNifty levels, some of the stocks are approaching critical buy zones. In my last post I had mentioned Larsen and SBI bands.

Today, I find value buying in 3 scrips coming up

NiftyBees - CMP is 525 and it may slip to 450 levels as well. With a 3 year horizon one can ignore the short-term volatility and accumulate on every 50-60 point fall. The longer term targets are 600+

BankBees - CMP is 885 and it may slip to 750 levels as well. With a 3 year horizon one can ignore the short-term volatility and accumulate on every 50-60 point fall. The longer term targets are 1350+

ITC - A stock in the consumption theme. Bulk of the revenues come from the tobacco business, followed by FMCG. The hotels line may not add too much in the bottom-line. 240-270 is a strong buy zone for longer term contracts of 375+ Dividends are also healthy.

Keep a Stop Loss with 2 consecutive closes below 200 as that will open ITC for 150 where one can re-enter.

If you can live with some short-term losses, the current chaos is providing good entry points. Happy Investing

Monday, August 19, 2013

Some Blue Chip Stocks Approaching Buy Zones - Part 2

As discussed last time as well, here are some updates to the value buying list for longer term investments

1] Larsen [LT]

Accumulation Band: 500-750 [Earlier band of 700-900]

Fundamentally sound company with good dividend yields. Over a 3 year horizon, it is expected to trade around 1250+ levels which is the profit-booking zone. One may start using current dips to buy for longer term investments.

Yes the counter has some NPA issues as with all PSU banks. The warning that the counter is set to test 1600-1800 bands was given even when it was trading at 2750 levels. In the short-term, it may slip to 1400 also. However, bottom-fishing is difficult. Accumulation band is 1400-1800 levels. Should there be some short-term blips below 1400 also one need not be worried. The dividends and longer term target of 2750-3000 is intact for SBI. One can buy into these dips for a 2-3 year horizon.

These are 2 heavy weight index stocks that bounce back much faster than the index itself when the longer term uptrend returns.

Please note that the current price levels in SBI and LT are almost near 2010/2011 lows when Nifty was at 4500-4800 levels. The consumption theme and IT theme will soon lose flavor when the Rollar returns to normalcy and stretched valuations make themselves unfurl. One can comfortably deploy around 20% of one's investment amount in these 2 stocks in 3 to 4 tranches over the next 2 months.

This is indeed a value buying / discount buying opportunity that does not present itself often IMHO. Happy investing.

Saturday, August 17, 2013

Real Game Changer For Global Markets - Germany not US

A very horrible session for Indian bourses on 16th August '13 with almost 6% shaved off BankNifty, almost 800 points off Sensex and 200 points off Nifty. A couple of months ago, I had mentioned that Indian bonds were rallying with a significant reduction of 1% on the coupon rate of 10 Year RBI treasuries. It was a huge positive. I had also mentioned that it is the bond markets that drive other asset classes in any country.

The second part has stayed intact but the first part of this outlook fell flat on its face over the last 3 weeks. With higher interest rates imposed by RBI for overnight funding of banks and the Rollar kissing the 62 mark, Indian bonds are now trading with one of the widest gaps ever in the last 5 years. Whilst the coupon is 7.16%, the current yields in the money markets are over 8.6% and this is far worse than 2012 now. In 2012, the coupon was 8.16% and the highest yield over the counter was about 8.3% and the lowest around 7.8% In such a scenario, FMPs will be very very badly hit. [and they have suffered a lot of damage already]
Yesterday's fall can be largely attributed to the Rollar price and the surge in Indian Bond Yields.

Sentiments are extremely bearish and virtually every media outlet on tv or online is trying to attribute challenges to the US Fed decision of tapering QE. First and foremost, one must remember that tapering does not imply end of QE. All that the US Fed said was that it will review the situation and decide on the quantum of QE from the current USD 85 billion to some other amount. One must understand the key motivation factor for US as a whole - they want to ensure that the demand for dollars keeps surging at any given point of time. US has been following QE for over 5 decades now [since World War 2] i.e. printing money. This will go on forever, to the extend the world recognizes USD as the reserve currency of the globe. Names and forms will keep changing i.e. QE, Operation Twist, War on Weapons of Mass Destruction, Return of Democracy in Middle East etc etc etc - yes you heard it right. Even the so-called wars are nothing but a bid to prop up demand for dollars - period. So most people who will look at the US Fed decision on QE and take trading/investment positions accordingly IMHO will lose big time.

Markets are very well aware of continuous QE from US in all formats and hence in the larger scheme of things, it will be a non-event [there will be knee-jerk reactions in either direction of indices when press statements are released by FOMC]

The real game changer for Global Markets is actually the elections in Germany in 3rd week of September. That is something that nobody in mainstream media wants to talk about and the central bankers / politicians are happy to have it that way. Germany under leadership of Merkel has been bailing out Euro-zone countries for almost 6 years now without much respite. One should not forget that Draghi at ECB is literally powerless without green signal from Merkel to continue LTRO operations.

Merkel keeps saying in media that she is worried about tax payers' money being blown out but that bottom-line is that she is happy to go with the LTRO arrangement for now. Key motivating factor is that contrary to media reports, the fact is that Germany is heavily dependent on exports [both international and intra-Europe] The LTRO operations help German businesses big time. We have come to a stage where the nominal interest rates in Germany [for institutional deposits] is standing at -0.25% This means that to park money with the German central bank, the depositor has to pay interest to the bank!!! [of course the motivation behind this from investors is safety and a potential windfall gain should Germany return to DMs] also Germany's borrowing costs are lowest as a result of this kind of a setup.

Let us start with Merkel's current position and chances; German tax payers i.e. the middle class do not like Merkel too much right now. They feel that Merkel is siphoning off hard earned German tax money to peripheral European countries for simply too long. They are very clear that even billions of Euros as bailouts cannot actually change reality. Trillions and Quadrillions of Euros are needed for a full-fledged normalcy and this state can only be achieved by money printing. They fear the worst in such cases as Germany has gone through a very very hyperinflationary phase in World Wars where wheelbarrows of millions of DMs could barely buy a pack of milk and bread.

From the German business point of view, Merkel is 2nd only to GOD. She bails out nations and then her think tank ensures that most of the bailout money comes back to German corporates by means of tenders, business deals etc. They will offer thumbs up for her to continue at the helm. Until the election verdict is out, a lenient approach by ECB and Germany will continue as it is.

So things are not that hunky dory for the incumbents i.e. CDP in Germany. On the other hand, opponents of Merkel are hard-liners as far as economics is concerned. They are very clear that Germany must stop their version of QE [via bailouts] and restore the DMs. It is short-term pain for a long-term gain. Finland now is almost the defacto number 2 voice for the Euro-zone and Finland has been against bailouts after the 1st tranches were given off to Greece and Portugal.

Even if Merkel comes back, this time to ensure that she [or her party] continues, she will have to harden her stance and reduce bailout amounts. Should anti-incumbency come through, bailouts will be near zero! With the pain in Euro-zone worsening with more and more members joining PIIGS, Germany has approached a cusp moment of this era: Germany created the common Euro and rather than booting out so many members from the common Euro-zone, there is every chance that Germany might find it easier to work on its own exit and leave the PIIGS to decide further course of action.

To summarize, one need not look at US Fed [or BoE, BoJ for that matter] because demand for dollars will keep coming through. Germany is the game changer for global markets and stay tuned to that. Just to put things in perspective, the tactic currently used is similar to the tactics used by Japan during the Pearl Harbor explosion. Send one ship towards the west and let spies keep following that ship [equivalent of focus on US Fed today] send the real bombing ship eastwards to attack Pearl Harbor [what Germany will do] Japan also followed a similar strategy to outsmart Brits in Singapore when they captured Sentosa.

What Japan does as an excellent military strategy, Germany does so in economic wars. Be alert - learn where to focus without letting the media chronicles distracting you. They will always be late in reporting news as breaking news; the prudent and independent person uses his/her own discretion and directs focus to the core - the core for now is Germany

Clock is ticking tick-tock-tick-tock - Euro-zone break-up is inevitable; the only question is October 2013 or October 2016...........................................

Friday, August 9, 2013

Why Many EW Counts Go Wrong in India???

To begin with, I must admit that I am still pretty a novice with EW counts but have seen a lot of charts, labels, counts made with the aid of EW and yet, most often than not, things don't fall in place. Is it the case that the EW Theory is wrong? Many a time, people feel, this may perhaps be true because even Bob Prechter and his team have got a lot of counts wrong since May '11.

As I have kept mentioning earlier this year as well, the real reason why Bob Prechter and team have got counts / trades wrong is because they are 'looking for what they want to see' and 'what they feel'. It is precisely this own bias clouding judgement that has gotten them all over currently. Is this the first time that it has happened to them? No, perhaps around 2005-2006 itself, they had put some illustrative charts on Fannie Mae and Freddie Mac and predicted that they would become penny stocks. Did it happen? Yes it did but just that it took 3 more years to happen.

Coming back to the Indian scenario and why a lot of applied Elliott Wave Analysis goes wrong. Let us go back to the 'fundamental ground rules' laid down by Elliott for scrips that do follow the Elliott Wave patterns [all covered in Chapter 1 and Chapter 2 of the book]

1] Most commonly applicable on Market Indices
2] Applicable to cyclical industrial stocks and stocks that have healthy volumes [When the volumes are being spoken about here, remember that the initial Elliott Wave principles were laid down in 1920s and 1930s. So even on NYSE, the volume implied 'Delivery Volume' as the proportion of day-trading was minimal]
3] The index or the scrip must be able to follow a hierarchical structure of Super Cycle, Major Cycle, Minor Cycle going all the way down to minuette and sub-minuette levels. [Again remember, the smallest time frame available to Elliott at that time was 15 minutes and he chose to keep the least count at hourly basis]

I have seen many attempts at many forums where people are looking at 2 minute / 5 minute charts, looking for divergences etc but that is nothing more than an 'itch' to take a position or 'restlessness' to see a position move in favored direction. Sometimes, labelling at such fine degrees may fall in place but most times it won't. If one wants to have a good count of Nifty / BankNifty, the smallest time-frame used must be 1 hour IMHO

The other principle of selecting the scrip and ensuring that it is suitable for EW Analysis

First of all take the Monthly / Yearly chart of that scrip and see whether there is a hierarchical pattern with a large uptrend / downtrend and then waves / sub-waves within that. If such a pattern is visible on Monthly / Yearly charts ONLY then it should be considered for counts.

For illustrations

Nifty Monthly / Yearly Charts All-Time

The fundamental principles behind EW are

1. Mankind has been made for progress in the grand scheme of things
2. In progress, one moves 5 steps forward and 3 steps backward

So taking these principles into account on the Nifty Monthly Charts [We are still in the nascent stages of what is called 'Grand Super-Cycle]

The 1st Grand Super-Cycle Wave completed as a set of 5 Super-Cycle Waves when Nifty attained 6357 in Jan '08. After that, it has been in a corrective phase that is still on-going. If you feel that this is so time-consuming, I would encourage you to look at the Monthly/Yearly Charts of DJIA. For more than 6 decades, it was struggling in a range of 50-1000. It is the so-called 'Roaring Eighties' [The Baby Boomer Generation in Marketing parlance] that all resistances became history for a brief period of 5 years.

When will the Grand Super-Cycle 3rd Wave start for Nifty in India? Well that is difficult to answer as I don't have a crystal ball with me. However, the affirmation of the same can be confirmed when Nifty takes out 6357 with loads and loads of buying in cash by institutional investors and with significant delivery volumes. Howe high will that be? 1.618 times the 1st wave i.e. towards the 10K or 11K mark on Nifty. When will that happen? 0.618 times the time taken for the 1st wave to get over. It took almost 8 years for the 1st wave to get over. So it will still need a good 5 years after the current corrective phase is done with.

Before I dwell more upon this aspect, let me show you some charts where EW principles are clearly not applicable

DLF Monthly Chart
Is there any resemblance to the multi-year chart of Nifty? Its just headed one way since inception and that is down south i.e. sooner or later this will go to 0. Does this imply progress? I don't think so. So any trade taken on DLF with the help of EW will be a fluke as the scrip does not meet the basic criteria of EW principles.

ITC Monthly Chart
Does this qualify for EW Analysis; indeed yes as the progression is steady; volumes were high when it was trading at sub-25 levels and now it seems to have conquered all visible resistances and is trying to locate the next resistance.

Why these illustrations of DLF and ITC ? Just to drive home the point that scrips like JPAS, HDIL, IVRCL, IFCI, Suzlon etc etc never complied and perhaps will never be able to comply with Elliott Waves' fundamental criteria.

Bottom-line: EW works perfectly well on scrips that in the larger scheme of things obey the principles of 5 steps forward 3 steps backward criteria. If that is not the case, then forget applying EW principles to those scrips as probability of making losses are greater than otherwise [and we trade/invest for profits right???]

The next part that I mention maybe easier to say on hindsight but it is critical because this again corroborates my earlier comments that there are only a few trading sessions in a given year where in big gains can be locked in. One is free to look at the ticker as much as one wants but for long term gains, positions must be very little but those that garner large gains

Nov'10 onwards [13 month correction]
A:  a: 6338-5690; b: 5690-6181; c: 6181-5177
B:  a: 5177-5944; b: 5944-5196; c: 5196-5708
C: a: 5708-4721; b: 4721-5400; c: 5400-4531
[This entire structure completed a larger degree A, by the way after which the rally from 4531 started]

Again, the structure was a double zig-zag with more swing moves within but this is the larger scheme of things. In a 13 month period, these 3 corrective waves and their sub-waves gave a total of 3000 points. Given the fact that depending on time-frames one takes into consideration and stop losses being triggered etc, even if 2/3rd of these moves were captured by a savvy trader, 1 lot would have yielded 2000 points.

Now this is particularly important as the current downward move is pretty much on the same lines as the correction from Nov '10. Should you be alert and wait as a safe trader for the opportune moment to present itself on EOD basis, there are about 6 more legs of 200-300 points minimum [could go as high as 700 points] waiting to be lapped up. Rather than take a position everyday/week, hold on to the margins and once the signals come in go full throttle with 3 to 4 lots via futures and options.

So to end the entire sermon like post on Eid;
EW principles are absolutely valid [provided the conditions specified are used appropriately]
EW principles take into account Fibonacci ratios, time and price factors, supports and resistances as well
The least count time-frame to use EW analysis is 1 hour [60 minutes]
One should not be biased with one's own trading position whilst applying EW Analysis [or for that matter any form of price/technical analysis]
You just need 3 to 4 trading positions in a year to get whoppers and not positions everyday especially in the FnO segment