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.

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.

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

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. 

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. 

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.

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.