What a spectacular month it has been; personally, the most gratifying part were the downside targets being achieved for gold and silver that I have been indicating for almost 8 months now. What the slump also showed is that securities be it stocks, or precious metals take the stairs to go up but nosedive on the way down eroding upto 5 years of gains in a short span of 3 to 5 days :D
In my personal opinion, both gold and silver are on the verge of finding their bottoms in dollar terms. Longer term investors must not be worried with these short-term fluctuations [I find it funny that there were far more people willing to buy gold @ 1650 dollars an ounce and silver @ 29 dollars an ounce as compared to now]
The 5% odd rally after the steep fall does not mean much for gold; in case of another round of panic, gold may even slip to USD 1200 / Ounce and if that breaks, then we may see a sharper correction to USD 1000 per ounce also. Silver is almost bottoming out and difficult to go below USD 17 per ounce. Crude has another 20% to 25% correction remaining and a bottom should form around the USD 65-70 / barrel mark for Nymex Crude. Falls are excellent buying opportunities as the larger trend is UP. In terms of returns, gold will now provide about 12% per annum returns over a 3 year period and within a 5 year period, it should retest the September 2011 high of USD 1925 per ounce. Silver being higher beta will end up providing much better returns over a 5 year period. Crude will continue to remain sideways in the USD 60 to USD 150 mark over the next 2-3 years but over a 5 year period, it may finally break the ceiling and achieve the magical USD 200 per barrel mark.
One must also remember that the economic circumstances and the pains in various sectors continue as usual. What accentuated the sharp sell-off in gold is not Cyprus or any other country selling its gold reserves but a panic wave that brought about a lot of redemption pressures on ETFs in the major metal exchanges. We must note that developed economies have lower reserve requirements of physical gold. The balance can be held in the form of Long Futures Contracts; if we add up all the long futures gold contracts floating around the world, they amount to almost 20 times the production of physical gold!!! [these are recorded figures at CBOT and LME; if CFDs and unrecorded figures are taken GOD alone knows how much leveraged contracts are floating around; hundreds of trillions] These are nothing more than ponzi schemes to get gullible investors with the allure of high returns. As long as bullish sentiment prevails, redemption pressures are low. When the bears put in their grip, margin calls are triggered and asset prices get rationalized.
So retail investors must conquer their fears and use all dips as buying opportunities; the short-term fluctuations barely matter when one is looking to double one's money in 5 years. Also as far as buying physical gold and silver are concerned, one should just look at one's target buying price and just go ahead and buy it when the opportunity comes. Just like the property one stays in, any appreciation / depreciation is notional. We will use the asset and market values simply don't matter!!! [If in doubt whether the mega-trend is UP or DOWN for Gold, always compare with prices of platinum; if platinum trades below gold, then it is a sure shot signal that gold is in over-heated territory and a correction is impending; if gold trades below platinum, the greater the deviation between gold and platinum prices, greater is the potential for return. It signals buying opportunities :D]
Back to our markets, let us first review the charts of Nifty and BankNifty on Daily / Weekly basis
The bullish and bearish views remain unchanged from the outlook for April 2013
Bullish View: There is more upside to come with 2 consecutive closes above 5944 which give us targets of 6080-6180. 2 consecutive closes above 6180 and Nifty will zoooom sending down shivers to the bears
Bearish View: A top is in place and we are in the corrective phase similar to the one we had in 2011 that started from 6338 and went all the way down to 4531. If that is the case then the downside targets by mid-June are 5440, 5280 and eventually settling at 5092 [800 points from 5880 odd levels is the expectation]
5880 was the expected top for April series; the breakout on 25th April suggests that even if the bearish view holds, we should now expect a top in the 5944-5970 zone. If we look at the BankNifty charts, they are suggesting some more upside. In fact April was one of the finest months in BankNifty with almost 14% gains
May has traditionally been a down year and as the adage goes 'Sell in May and Go Away' This year, the major planet Jupiter is moving from Taurus to Gemini on 29th May 2013. Taurus is the sign of the bull. Gemini is a dual faced sign. This is a very significant move that will last for the next 13 months. This transit will bring in a lot of changes in the lives of people [as usual for some people it will be very positive and for some people, it may bring some discomfort from present status quo] This will also have a bearing on markets in general.
The positives of a potential rate cut of 50 bps and CRR cut is already built into the price of BankNifty. In case the RBI delivers on these 'expectations', then the upside is capped; if it falls short of street expectations, then there will be a knee-jerk reaction on the downside. Most banks are in over-heated territory and some of them are ripe for steep corrections. Some over-heated banks
1] SBIN: The asset quality is definitely a big concern. Last month, the SBI chairman mentioned that they will do what it takes to recover dues of the KFA debt of 7500 crores; first by selling the shares in its control and then perhaps going to the personal assets pledged by Vijay Mallya. What went un-noticed by the mainstream press was the fact that SBIN wrote down the debt and said whatever they recover is a bonus!!!
On raising capital, markets were positively surprised that SBIN had a very successful overseas debt issue with a 3.25% coupon rate. However, we should also note that Credit Default Swaps on SBIN are traded on the bourses of Hong Kong. FIIs are wary of both asset quality and stock price of SBIN and the Lehman Brothers crisis showed that the companies on which CDS instruments are traded are punished the most in a bear market scenario
2] HDFC Bank: Most of the loan growth is coming from personal loans and credit cards. The stock has almost shot up 100% over the last 14 months. Whilst the top management claims that appropriate collaterals are usually taken and that they only shell out calculated risks, unsecured loans are always a challenge. a 40% correction from current levels seems inevitable even if the larger trend is UP
3] Kotak Bank: This bank is rallying on the back of corporate loan portfolios and the top management is aggressively buying loan portfolios from foreign banks that are winding down their corporate debt portfolios. As we have seen in the Kingfisher or Suzlon debt scenario, corporate debts have a higher tendency to go bust and corporate entities are less incentivised to repay debts compared to individuals [In India, if you miss your EMI of 5k for 3 months, recovery agents will be at your doorstep but as a company you default on 5000 crores of debt, you make media headlines but will be seen guzzling beers in an IPL match or a fancy party on a yacht] Corporate Debt at 14% interest is unsustainable for growth and with more banking entities cropping up, corporate debt yields are poised to go down. So Kotak Bank is actually in a very risk-on mode and that is bad for the stock holders in the medium term. This stock is due for a 40% correction from the life-time highs before deciding the next course of action [I wouldn't be surprised to see Kotak Bank being booted out of the Nifty / BankNifty indices in the next 3 to 5 years]
4] Yes Bank: Good run up so far but the company's microfinance exposure is very high. IMHO this counter is all set to nose-dive pretty soon. Retail investors should book some profits on this counter now and cut long exposure.
The safe havens i.e. FMCG and consumption theme stocks have begun their corrections. If the bearish scenario does play out, even this segment won't be spared. Forget about what Bob Prechter and the EW team says about Nifty [they use wrong parallels like IT and Auto for their analysis] Indian equities are heavily dependent on how Banks pan out; that's the primary determinant followed by capital goods and infrastructure.
Overall, this is actually the time to take profit off the table from equities and cut long exposure. It is prudent to lock in some profits in Fixed Deposits when the yields are so attractive. IMHO, right now the investment corpus should be 50% cash, 25% precious metals an maximum 25% in equities. When Nifty started trading at 4800 and below, that is the time to increase long exposure to about 50% [This oversimplified example excludes real estate] For the middle class people [I belong to this class only!] the EMI for real estate should not exceed 40% of monthly take home income and the home loan should not exceed a duration of 7.5 years. Realty is actually starting a mini-correction and b end-June we should see across the board correction of at least 15% in real estate prices. The fact that HDFC has started offering 30 year loan tenures with an EMI of 875 per lakh per month is a leading indicator of the slump in real estate segment. Its the black market funds and private equity funds that are propping up prices at the moment.
The liquidity gush from central banks has overheated the equity indices and it will be very logical that some profit booking will take place going into summer 2013 [June is the peak summer month for Northern Europe and North America] Also the fall in gold prices have unlocked additional liquidity for emerging markets in particular. Overall, the bull market from the lows of 2009 seems to be approaching maturity now. A correction is overdue.
Global Market Perspective
What happened in Cyprus is just a pre-cursor of things to come from peripheral European countries. Contrary to what Germans are saying, the reality is that saving the Euro is in German interest. Should the Euro-zone break up, other countries will go back to their old currencies with upto 70% devaluation within 48 hours of inception [similar to what happened to Thai Bahts, Indonesian Rupaihs, Malaysian Rinngits in the Asian Currency Crisis] Countries like Spain, Italy will all become as competitive as Asian manufacturing locations. They will see a quantum leap in manufacturing and tourism. Germany on the other hand that is export driven [internationally as well as within Europe] will see a 200% to 300% jump in Deutsche Marks and a complete meltdown of its manufacturing segment. Also saving the Euro and showcasing the risks of peripheral countries helps Germany keeps its borrowing costs low in the bond markets [after all, the Bund is a far safer haven compared to even the US Treasuries]
So it doesn't matter what the ECB or Merkel says; one should look at the picture objectively and there is a very big political game that is being played. However, neither such financial engineering nor political engineering can save the Euro-zone continuing with a single currency. It is just a matter of time before somebody pulls the plug. Fundamentals in the global economy remain weak and most of the Fortune 500 companies are not doing well [with the exception of Oil related companies, high-tech companies and consumption theme companies]
The entire banking system in Europe is still skating on thin ice and when the bears secure their grips, the falls in equities across the globe will be similar to the crash in gold and silver. It just takes 3 to 5 trading sessions to erode 3 to 5 years of gains! How long can Apple, Google, Exxon, Shell etc keep the indices afloat?
So here are the links to video capsules summarizing the outlook and forecasts for May
[Just keep the mouse pointer under the word 'Link' and the links will appear]
Link1: Nifty / BankNifty Update:
Link2: Staying Invested / Myths and Facts
Link3: Precious Metals and Commodity Updates
Link4: Global Market Updates
In my personal opinion, both gold and silver are on the verge of finding their bottoms in dollar terms. Longer term investors must not be worried with these short-term fluctuations [I find it funny that there were far more people willing to buy gold @ 1650 dollars an ounce and silver @ 29 dollars an ounce as compared to now]
The 5% odd rally after the steep fall does not mean much for gold; in case of another round of panic, gold may even slip to USD 1200 / Ounce and if that breaks, then we may see a sharper correction to USD 1000 per ounce also. Silver is almost bottoming out and difficult to go below USD 17 per ounce. Crude has another 20% to 25% correction remaining and a bottom should form around the USD 65-70 / barrel mark for Nymex Crude. Falls are excellent buying opportunities as the larger trend is UP. In terms of returns, gold will now provide about 12% per annum returns over a 3 year period and within a 5 year period, it should retest the September 2011 high of USD 1925 per ounce. Silver being higher beta will end up providing much better returns over a 5 year period. Crude will continue to remain sideways in the USD 60 to USD 150 mark over the next 2-3 years but over a 5 year period, it may finally break the ceiling and achieve the magical USD 200 per barrel mark.
One must also remember that the economic circumstances and the pains in various sectors continue as usual. What accentuated the sharp sell-off in gold is not Cyprus or any other country selling its gold reserves but a panic wave that brought about a lot of redemption pressures on ETFs in the major metal exchanges. We must note that developed economies have lower reserve requirements of physical gold. The balance can be held in the form of Long Futures Contracts; if we add up all the long futures gold contracts floating around the world, they amount to almost 20 times the production of physical gold!!! [these are recorded figures at CBOT and LME; if CFDs and unrecorded figures are taken GOD alone knows how much leveraged contracts are floating around; hundreds of trillions] These are nothing more than ponzi schemes to get gullible investors with the allure of high returns. As long as bullish sentiment prevails, redemption pressures are low. When the bears put in their grip, margin calls are triggered and asset prices get rationalized.
So retail investors must conquer their fears and use all dips as buying opportunities; the short-term fluctuations barely matter when one is looking to double one's money in 5 years. Also as far as buying physical gold and silver are concerned, one should just look at one's target buying price and just go ahead and buy it when the opportunity comes. Just like the property one stays in, any appreciation / depreciation is notional. We will use the asset and market values simply don't matter!!! [If in doubt whether the mega-trend is UP or DOWN for Gold, always compare with prices of platinum; if platinum trades below gold, then it is a sure shot signal that gold is in over-heated territory and a correction is impending; if gold trades below platinum, the greater the deviation between gold and platinum prices, greater is the potential for return. It signals buying opportunities :D]
Back to our markets, let us first review the charts of Nifty and BankNifty on Daily / Weekly basis
The bullish and bearish views remain unchanged from the outlook for April 2013
Bullish View: There is more upside to come with 2 consecutive closes above 5944 which give us targets of 6080-6180. 2 consecutive closes above 6180 and Nifty will zoooom sending down shivers to the bears
Bearish View: A top is in place and we are in the corrective phase similar to the one we had in 2011 that started from 6338 and went all the way down to 4531. If that is the case then the downside targets by mid-June are 5440, 5280 and eventually settling at 5092 [800 points from 5880 odd levels is the expectation]
5880 was the expected top for April series; the breakout on 25th April suggests that even if the bearish view holds, we should now expect a top in the 5944-5970 zone. If we look at the BankNifty charts, they are suggesting some more upside. In fact April was one of the finest months in BankNifty with almost 14% gains
May has traditionally been a down year and as the adage goes 'Sell in May and Go Away' This year, the major planet Jupiter is moving from Taurus to Gemini on 29th May 2013. Taurus is the sign of the bull. Gemini is a dual faced sign. This is a very significant move that will last for the next 13 months. This transit will bring in a lot of changes in the lives of people [as usual for some people it will be very positive and for some people, it may bring some discomfort from present status quo] This will also have a bearing on markets in general.
The positives of a potential rate cut of 50 bps and CRR cut is already built into the price of BankNifty. In case the RBI delivers on these 'expectations', then the upside is capped; if it falls short of street expectations, then there will be a knee-jerk reaction on the downside. Most banks are in over-heated territory and some of them are ripe for steep corrections. Some over-heated banks
1] SBIN: The asset quality is definitely a big concern. Last month, the SBI chairman mentioned that they will do what it takes to recover dues of the KFA debt of 7500 crores; first by selling the shares in its control and then perhaps going to the personal assets pledged by Vijay Mallya. What went un-noticed by the mainstream press was the fact that SBIN wrote down the debt and said whatever they recover is a bonus!!!
On raising capital, markets were positively surprised that SBIN had a very successful overseas debt issue with a 3.25% coupon rate. However, we should also note that Credit Default Swaps on SBIN are traded on the bourses of Hong Kong. FIIs are wary of both asset quality and stock price of SBIN and the Lehman Brothers crisis showed that the companies on which CDS instruments are traded are punished the most in a bear market scenario
2] HDFC Bank: Most of the loan growth is coming from personal loans and credit cards. The stock has almost shot up 100% over the last 14 months. Whilst the top management claims that appropriate collaterals are usually taken and that they only shell out calculated risks, unsecured loans are always a challenge. a 40% correction from current levels seems inevitable even if the larger trend is UP
3] Kotak Bank: This bank is rallying on the back of corporate loan portfolios and the top management is aggressively buying loan portfolios from foreign banks that are winding down their corporate debt portfolios. As we have seen in the Kingfisher or Suzlon debt scenario, corporate debts have a higher tendency to go bust and corporate entities are less incentivised to repay debts compared to individuals [In India, if you miss your EMI of 5k for 3 months, recovery agents will be at your doorstep but as a company you default on 5000 crores of debt, you make media headlines but will be seen guzzling beers in an IPL match or a fancy party on a yacht] Corporate Debt at 14% interest is unsustainable for growth and with more banking entities cropping up, corporate debt yields are poised to go down. So Kotak Bank is actually in a very risk-on mode and that is bad for the stock holders in the medium term. This stock is due for a 40% correction from the life-time highs before deciding the next course of action [I wouldn't be surprised to see Kotak Bank being booted out of the Nifty / BankNifty indices in the next 3 to 5 years]
4] Yes Bank: Good run up so far but the company's microfinance exposure is very high. IMHO this counter is all set to nose-dive pretty soon. Retail investors should book some profits on this counter now and cut long exposure.
The safe havens i.e. FMCG and consumption theme stocks have begun their corrections. If the bearish scenario does play out, even this segment won't be spared. Forget about what Bob Prechter and the EW team says about Nifty [they use wrong parallels like IT and Auto for their analysis] Indian equities are heavily dependent on how Banks pan out; that's the primary determinant followed by capital goods and infrastructure.
Overall, this is actually the time to take profit off the table from equities and cut long exposure. It is prudent to lock in some profits in Fixed Deposits when the yields are so attractive. IMHO, right now the investment corpus should be 50% cash, 25% precious metals an maximum 25% in equities. When Nifty started trading at 4800 and below, that is the time to increase long exposure to about 50% [This oversimplified example excludes real estate] For the middle class people [I belong to this class only!] the EMI for real estate should not exceed 40% of monthly take home income and the home loan should not exceed a duration of 7.5 years. Realty is actually starting a mini-correction and b end-June we should see across the board correction of at least 15% in real estate prices. The fact that HDFC has started offering 30 year loan tenures with an EMI of 875 per lakh per month is a leading indicator of the slump in real estate segment. Its the black market funds and private equity funds that are propping up prices at the moment.
The liquidity gush from central banks has overheated the equity indices and it will be very logical that some profit booking will take place going into summer 2013 [June is the peak summer month for Northern Europe and North America] Also the fall in gold prices have unlocked additional liquidity for emerging markets in particular. Overall, the bull market from the lows of 2009 seems to be approaching maturity now. A correction is overdue.
Global Market Perspective
What happened in Cyprus is just a pre-cursor of things to come from peripheral European countries. Contrary to what Germans are saying, the reality is that saving the Euro is in German interest. Should the Euro-zone break up, other countries will go back to their old currencies with upto 70% devaluation within 48 hours of inception [similar to what happened to Thai Bahts, Indonesian Rupaihs, Malaysian Rinngits in the Asian Currency Crisis] Countries like Spain, Italy will all become as competitive as Asian manufacturing locations. They will see a quantum leap in manufacturing and tourism. Germany on the other hand that is export driven [internationally as well as within Europe] will see a 200% to 300% jump in Deutsche Marks and a complete meltdown of its manufacturing segment. Also saving the Euro and showcasing the risks of peripheral countries helps Germany keeps its borrowing costs low in the bond markets [after all, the Bund is a far safer haven compared to even the US Treasuries]
So it doesn't matter what the ECB or Merkel says; one should look at the picture objectively and there is a very big political game that is being played. However, neither such financial engineering nor political engineering can save the Euro-zone continuing with a single currency. It is just a matter of time before somebody pulls the plug. Fundamentals in the global economy remain weak and most of the Fortune 500 companies are not doing well [with the exception of Oil related companies, high-tech companies and consumption theme companies]
The entire banking system in Europe is still skating on thin ice and when the bears secure their grips, the falls in equities across the globe will be similar to the crash in gold and silver. It just takes 3 to 5 trading sessions to erode 3 to 5 years of gains! How long can Apple, Google, Exxon, Shell etc keep the indices afloat?
So here are the links to video capsules summarizing the outlook and forecasts for May
[Just keep the mouse pointer under the word 'Link' and the links will appear]
Link1: Nifty / BankNifty Update:
Link3: Precious Metals and Commodity Updates
Link4: Global Market Updates
