Are We Heading To a 1929 Situation???

Over the last few days, I have heard / read a lot of doomsday and apocalypse forecasts that we are about to witness the next 1929 like situation. The basis for this forecast is the current volatility in the market.

As of now, there are no indications that we are going to enter a 1929 like situation. The odds are one in a million. Then the next question is are we going to witness a 2008 like situation. That is definitely possible though the odds are still one in a thousand.

First of all, let us understand that the current corrective trend in stocks be it India, Europe or US, was expected. Stocks were highly overbought and a profit booking and corrective trend was but natural. This correction was overdue in November/December but took longer. History suggests that the longer the delay in correction, the harder is the impact. That is exactly what has happened as of now IMHO.

The technical structure and quantitative analysis experts were keenly anticipating this fall. For Nifty and for DJIA, I expect stability around 9725 and 23200 levels respectively. All this is assuming status quo and no Black Swan events. Black Swan events cannot be priced in!

Whilst all this is true, some of you may ask why a 2008 like situation is possible yet again. First and foremost, we must understand that the financial markets are largely driven by bonds. The bond market goes into several multiples of all stock markets and commodity markets put together. Be it 1929, 2000 or 2008, the troubles always began with the bond/fixed income markets.

For the last 8 years, we have had unparalleled easy money policy with near zero interest rates and ample liquidity. This liquidity although was meant to revive the economy, all the large banks largely used this money to prop up the stock market rather than stabilize economies of common people.
Bond prices and bond yields have a negative correlation i.e. when the interest rates are low, the bonds command a higher price and vice versa. This is where a ticking time bomb is running right now with the large banking corporations. The large banks paid higher prices for the near zero rate yield bonds and are now staring at large losses on their portfolio. Every basis point (100 basis points = 1%) increase in interest rate means millions of dollars worth of losses for bond portfolios of large banks.

This has to be accounted for on a Mark To Market basis and reported to shareholders and competent authorities. The common man perhaps does not get access to this information. Nothing on this front has been reported anywhere as of now. Cumulative quantitative easing history estimates that at least 4 trillion dollars/euros/pounds were released to the banking system. Now imagine the loss that will cascade to the stock markets and common man if 25% of this amount is booked as losses on bond prices. Hence, I am very cautious in the current bull market conditions. Given the fundamental nature of the bonds, these bonds are still valuable. In case of Lehman Brothers and all the financial institutes that followed, the bonds were junk. The bonds were issued on the basis of imaginary future payments and a perpetual 15% increase in housing prices. This time, the case is different. We are looking at bonds issued by central banks; they are real. The bonds may definitely lose some value due to changes in the yield curve but that is fine. Given the rate hike forecast, the US securities (fixed income) will at best see a 30% markdown. This will trickle to the stock and commodity markets as well.

The manifestation of these drops could be attributed to Trumponomics, Brexit or whatever - the point is that people are alert and aware of such a situation coming up.

To summarize - there is NO FINANCIAL MELTDOWN in the near future.
Possibility 1: The markets will go through the cyclical correction in the structural bull market. This is the phase we are going through right now. Till the Nifty holds 9725 and till DJIA holds 23000 (given or take a couple of %s) I will still maintain this view.

My probabilistic estimate: 95%

Possibility 2: The bond market jitters trickle into stock markets with the 25% to 30% markdowns. Then the stock market will about 40% to 50% corrections from the all time highs.

My probabilistic estimate: 4%

Possibility 3: We actually see bad turns out of things like Trumponomics, Brexit, Eurozone instability etc etc etc and a severe recession. 90% correction from all time highs

My probabilistic estimate 1% (2018 - 1929 = 89 : A Fibonacci Number!) Hence I am giving this a 1% change instead of a few basis points

So the view is largely in favor of the bull case. Anything can happen in the market - so for the common man, it is important to build some insurance in the stock portfolio by buying some protective puts. This is extremely easy in developed  markets. In India, the options market is highly manipulated and do not perform very efficiently. I will be writing a separate post on how to make best out of the Indian options market to protect your portfolio to some degree (Note that the article will be for genuine long term investors and not the short term punters who buy/sell options)

Happy Investing and enjoy the Easter festivities coming forthwith.

Modinomics V2 and Market Perspectives - Part 1

Hello friends
The last couple of months have seen sharp moves in either direction. Here are some of my preliminary observations with Nifty vis a vis Modinomics and Nifty vis a vis global markets

Outlook vis a vis Modinomics
Let us recap to the time in 2013 when Nifty made a high of 6415, corrected downwards to 5120 and bounced back; I presume the same pattern will repeat itself. My humble opinion - buy the dips as far as equity investments are concerned. My preferred bets are

Nifty Bees, Bank Bees, Junior Bees, PSU Bank Bees
[Disclosure I have holdings in these scrips and have recommended the same to my friends and family]

You can check my previous post where I have highlighted some stocks that than beat the average market returns. All investments must be made with an SIP mode.

Expected Path: Peak in the 10700 zone followed by a correction to 9600 with interim peaks, troughs and sideways market conditions.

As far as A Group Stocks and Indices are concerned, I follow the advice of Nadeem Walayat - "Greater the downward deviation  from peaks, greater the incentive to buy

Political factors that will trigger trending moves on Nifty
Based on current outlook, it seems near certain that Modi will be back as PM again with a 300+ majority in the NDA alliance. Some of the states with impending elections will trigger short term spikes or falls in the market. From a Union Budget perspective, though the markets did not cheer the same but that is always expected when a party is going into the election phase. The budgets will be populist as the rural votes create the votebanks. My view is that as far as educated youth are concerned, they have understood the concept of JAM (JanDhan-Aadhar-Mobile) measures.
The negative response to LTCG was not expected. Mr Jaitley has this knack for not clearly speeling out the the plans and getting smooth implementation. Happened with Demonetization and deja vu for GST.

The steps towards digitizing the economy have shown good progress and the next steps seem encouraging. GST implementation and roll-outs have not been as streamlined but these are initial steps to the larger benefits.c[ So my vote is disclosed heads up!!]

To summarize, as far as stock investments are concerned, I'm in favor of "Buy The Dips" with NDA 2 as the winner.

From a global market perspective, Dow was also overbought and is now in a corrective mode. My take is that it is in the last phase of correction. Accoring to my analysis, it will form a base around 24000 levels and resume uptrends. This analysis when juxtaposed with my Modinomics analysis, comes pretty much in line with anticipated price moves.

Commodity Markets: In dollar terms, prices have come to the USD 65 dollars / barrel mark. If we analyse WTI Crude prices, the pivot point is USD 65 dollars a barrel. Though manias can take prices anywhere between 25 dollars and 100 dollars.

Gold will confirm its uptrend with 2 consectutive closes above USD 1400 per ounce for targets 1550-1600

Currency : I expect the rupee to be in the range of 63-66 vs dollar this year.

To wrap up up part 1 of this series, I sign off. The next part will be more illustrative with analytic graphs and tables to support my forecasts and better outcomes of the forecast. Stay tuned to my updates [Always free with disclosures on personal holdings]

Adios

Outlook For Q3/Q4

So the Nifty has scaled the 10k mountain; much sooner than I had expected. My original outlook was that Nifty would cross the 10k barrier after the next national elections. So let us analyze the current major factors and the probable course of Nifty.

First of all, let us consider the banks. No matter how hard the government will make it for the bad loans from large corporates, recovery will be extremely difficult and time consuming. On the PSU banks front, there is only one way out; consolidate into 3 or 4 large banks on the "Too Big To Fail" scale. SBI has already done it and there will be more to follow soon. RBI has kept the rates at a very low level and it seems to have hit the rock bottom now. The threat of inflation is now grave. Liquidity in the market has been unprecedented.

The much awaited correction will perhaps come sooner than later but that does not warrant shorting the market. Although it may may not be correct fundamentally, the price on the ticker does not lie. Unless 8880 is not breached on the downside, it is a buy on dips market. What is the next peak for Nifty to scale? 11415 is the next peak we are looking at over the next 18 months.

Now there are no fears of a BrExit and the Germans are pretty much in control of the situation in Europe. To the extent Germans have control, the PIIGS crisis also will stay at rest. However, one needs to be very careful about selecting the stocks right now and midcaps and smallcaps are best to avoid. The way IPOs are soaring, one has every reason to be suspicious because unfortunately, a string of successful IPOs on Dalaal Street has always been a harbinger of darker days coming ahead. That being said, the levels Nifty is testing now will make the dark days seem like a little blip over the longer term. The larger trend is headed north and will continue to do so until the next election.

Now talking about politics, we may not have to wait till May 2019 for the next election outcome. In all likelihood, we may see the elections as early as Diwali 2018. The BJP has almost crossed out all the red flags for the second term in office. Maharashtra, UP, Bihar, MP, Rajasthan are all in the kitty. The youth power is with the PM; the Rajya Sabha numbers are also working out in favor. Unless something really bad like some black swan event takes place, I see no reason why this government will not come into power again.Therefore from institutional funds' perspective, India is pretty much a safe bet compared to other BRICS nations.

Outlook for commodities; in terms of prices in USD, commodities seem to have hit the bottom and are now starting the next leg up. From a technical and wave perspective, they may just correct once more to retest the bottoms and bounce back. nymex Crude oil may retest the USD 35 - USD 40 levels and then gallop back to USD 65 levels. Gold may just test USD 1150 levels once more, shake out some of the weak hands and then climb back to USD 1550 levels.

Sectors to avoid in India right now; telecom, base metals and media. It will take at least a year more for markets to fully price in the impact of Jio and there is a lot of room for downside there. If the commodities go for retesting old lows, then base metals will be the first to join the pack down. Media space is extremely volatile right now and far too overvalued. What happened to Airtel, Idea and Vodafone in telecom space will happen sooner or later to the media stocks. Hotstar, Amazon Prime and Jio TV will soon have a similar impact on conventional media. I also expect Jio and Amazon Prime to bring some disruptions to the DTH business. The day is not far when there will be just a small black box in our homes that will power the internet and tv content for us and that too at extremely affordable prices.

To summarize, every fall in the largecaps and large banks is an opportunity to buy. Commidity stocks, telecom stocks and media stocks are best avoided till the prices rationalize. Shorting can prove dangerous and there is room for a lot of upside. Wishing all of you greetings in advance for the upcoming festivities. Unless there is some major thing to worry about, my next post for Nifty will be around Christmas with outlook for 2018.

IPL 2018-2022 "Winner's Curse" SWOT Analysis and Forecast

Well now that we know that in all likelihood, the next IPL bidding is going to turn into a winner's curse, let us look at the SWOT analysis of some of the key stakeholders bidding for the broadcasting rights

As of now, 18 bidders have been reported for the broadcasting rights

1. STAR India

2. Amazon

3. FollowOn Interactive Media

4. Sony Pictures Network

5. Times Internet

6. SuperSport International (Pty) Ltd

7. Reliance Jio Digital

8. Gulf DTH FZ LLC

9. GroupM Media

10.beIN IP

11. Econet Media

12. SKY UK

13. ESPN Digital Media

14. BTG Legal Services

15. BT PLC

16. Twitter Inc

17. Facebook Inc

18. Taj TV India

This article and the next two will discuss the SWOT analysis of these players

1. STAR India

Well they already have the digital broadcasting rights for a lot of tournaments and the company is currently a market leader when it comes to content for sports on Indian TV. Hotstar is definitely a rockstar right now when it comes to digital content and consumer delight. Let us not forget that STAR was the front-runner in the previous bidding session as well. The company rightly made a conditional bid to BCCI and BCCI decided to shelve this bid as BCCI wanted unconditional bids.

SWOT: The group has already done the IPL in digital format. The team has covered a lot of sports globally and has a lion's share as far as BCCI broadcasting rights are concerned. However, the IPL is different. STAR India / Hotstar CANNOT go solo on this. And this will be true for most players in the bidding.

Odds of Winning: 25% (solo) / 80% with Jio

2. Amazon (Probably bidding only for digital)
Amazon, has made the bold statement of its intent with the television series Inside Edge on Amazon Prime. One of the best Roman a Clef genre content on Indian TV ever so far - it was a fantastic signal to all stakeholders "We are serious about getting in and we are aware of the dirt that comes along with it!"
Although late to enter the Indian mobile tv turf, it has swept all incumbent players off charts. Amazon Prime has features like fast forward as well (compared with only rewind for Hotstar) and charges much lower 499 annually compared to 199 monthly with Hotstar. IMDB is its subsidiary. What is good about Amazon's approach is that it has a collaborative outlook with studios, directors, producers etc. There is a lot of data mining required to do when it comes to targeted advertising on digital space and Amazon is second only to Google when it comes to that.

Odds of Winning: 50% (solo) / 95% with Jio / 100% with a 3 way match Sony-Amazon Prime-Jio

3. Sony
Let us not forget that this company still has the first right of refusal and the network will try very hard to keep it that way. Unfortunately, it did not win the digital rights earlier and digital as it turns out is not Sony's cup of tea. In fact most of Sony's movies also go through Jio or Amazon Prime. Last but not the least, IPL is the only major cash cow that Sony has.

Odds of Winning 50% (solo) / 95% with Jio /100% with a 3 way match Sony-Amazon Prime-Jio

4. Jio
Jio has been doling out good things with each passing day and wants to capture as much of telecom and digital space it can. It has the financial muscle to see this through. To cut the long story short, Jio has the infrastructure and network but perhaps not the capabilities when it comes to broadcasting. Mumbai Indians being one of the teams can also create a conflict of interest

Facebook, Twitter and all the others will have the same thing. According to me, Amazon Prime and Jio will have a major role to play as far as the next set of IPL broadcasting rights go. For the advertising revenues, you need more and more of reach and Jio can make that possible. Analytics will also play a major role and Amazon can make that happen. When it comes to actual backend for operations and logistics of coverage, both STAR and Sony have the capabilities though STAR has the edge over Sony.

My forecast: HOTSTAR+Jio 40%
Sony+Amazon Prime+Jio 60%

Let's watch out how this plays out.

IPL Bidding 2018-2022 "The Winner's Curse"

Well let us take a break from Nifty and the negativity around jobs. It is the cricket season and an exciting time as we are going to have bidding for the broadcasting rights for IPL 2018 to 2022.

The last time bidding was done was in 2008 when mysteriously, the lone player in the foray was Sony. Star India's bid got rejected as their bid was conditional and BCCI wanted a non-conditional bid. Well whatever happened, we know that Sony paid USD 900 million for exclusive television rights for a period of 10 years. Without taking into account inflation and exchange rate fluctuations etc, that was a bid of 5000 crores for a period of 10 years. The estimated revenue that Sony got for IPL 2017 is pegged between 1100 crores and 1300 crores. We also know that the previous investment was recovered within 3 years.

Now that the new tendering process has started, bids have been invited by the BCCI. There are about 16 to 18 players in the foray. Obviously the television channels will all be out there and thanks to the digital era, some of the interesting bidders are companies like Reliance Jio, Facebook, Twitter, Amazon

In this three part article, I will cover the merits/demerits of the bidding structure, SWOT analysis of bidders and revenue streams for bidders. First things first, I want to discuss the merits and demerits of the current bidding structure itself.

We all know that the BCCI believes in hegemony as it wields a lot of power in the places that matter. As compared to the last time that the bidding took place, the BCCI has wisely invited bids from multiple parties and hopefully there will be more transparency. What has shocked me is the minimum reserve price that BCCI has pegged for the broadcasting rights for the next five years.

Considering the scathing review BCCI got from the Lodha panel and considering how little BCCI has given back for development of the game, the current reserve prices are appalling; this is an encore of what happened with the telecom spectrum and telcos. Based on the public information available about the advertisement slots, past collection data, here is my graph of projected earnings for IPL 2018 to 2022

The workings of this graph are in the excel file here

I will be updating information and the workings  behind this graph from time to  time.

As of now, the biggest revenue source is television advertisement slots and it will continue to be for the next five years. Television advertisement inventory is sold as 10 second slots and an average IPL match has about  230 to 250 10 second slots depending on the stage of the game. A lot of hype is going on about the digital space and IPL 2017 showed an average 2 million users on hotstar for each match. Going by Google/Youtube's pay of 1 dollar / 1000 views translates to about 1 rupee per user per match in the digital space. Now that virtual reality devices have come in and soon, we will have the luxury of watching sports in 3D on our smartphones, the revenue per user can notch up much higher with subscriptions but we also need to remember that this is just the beginning. The digital revenues won't be as high as a lot of media pundits are projecting them to be.

With some basic assumptions, my back of the envelope suggests a revenue of about 6,000 crores for IPL2018 to 2022. Taking some more optimistic projections and title sponsors and technological disruptions, 8,000 crores is the best case scenario. Remember that we have an election coming in between and one structural bear market scenario that will play out. There will be a lot of discretionary spending taps closed for at least two seasons. This means that the winner cannot bet on pure advertising revenues. Right now, BCCI is expecting upwards of 16,000 crores and that is not a price worth paying at all. Any price above 8,000 crores for a 5 year contract is going to end up as a proverbial "Winner's Curse" The money will be made with more activities upstream and downstream

In the next two parts of this series, I will discuss the SWOT analysis of major players in the bidding ring for the IPL auction

AI/Robotics/Automation - ITEmployees Cry Foul - Part2

This is part2 of the intended 4 part story with regards to job losses in IT/ITeS segments [which is what the media is talking a lot about], the slowly worsening situation in telecom post Jio [not much is being talked about] and the impending consolidation in PSU banks [almost nobody is talking about]

Today, I came across 2 contrasting opinions. One by the almost revered guru of Indian IT, Narayan Murthy and other by a veteran who got TCS to where it is today, N Chandrashekharan. According to Narayan Murthy, the top managers in IT companies have to take cuts in their paychecks. I agree with this part. He also expects companies to do as much as they can and stem unemployment. This, may I say is a utopian dream. Since the internet dot com bust, so many economists in the developed world have proposed part-time employment options to be taken by employees so that the stress on unemployment allowance is reduced and number of unemployed people goes down.

The challenge with this is that a person who has a job would like to go the whole mile to the extent s/he can in this VUCA environment - make hay when the sun shines. What Chandrashekharan has said is that we are becoming more and more digital and that means there will be more jobs. This is exactly what a lot of experts in hi-tech industries have been saying. There is a lot of demand for skilled labour. The problem that we are facing all over the world is that there is a gross mismatch in what the industry needs and the skills that the available talent pools have. In India this is a bigger problem.

As has been rightly said, re-skilling is the order of the day. If we look at the thousands of people in the IT/ITeS sectors today, there are broadly three categories of people. Highly skilled, highly motivated and people on top of their game - these guys are simply not worried. Most of them land the dream jobs they want even before somebody decides to give them a pink slip or they are confident enough to put themselves in the sweet spot sooner than later rather than compromise with the current employer. The sad part is that this is less than 2% of the workforce. The group of people is very special. Based on current economic trends, they are drawing a good salary, have settled into a good lifestyle but their talent levels are not as high as the new rules of the technology game demand. They were aware about it in the past but when the going was good, these short-comings were ignored. That will not be the case now. The biggest challenge with these people is that they have got so used to certain habits, skillsets and attitudes that it is extremely difficult to change unless these people decide to change themselves. Unfortunately, that segment is almost 40% of the workforce. For those who do decide to eventually change will need more time to get the basics right as compared to the youth who are learning these technologies upfront without any pre-conditions. The last segment is the ones who are currently at lower levels of the organization and are simply following SOPs. I fully believe in dignity of labour and I mean no offence to this segment in my previous segment. The work they do still matter a lot and even the new technologies will need these kind of people albeit in lower proportions.

Just to digress from the topic a bit - let us consider mobile phones - a technology gadget that most people use these days. Once upon a time Motorola was considered to be the best; then came Nokia with its super seller Nokia3310, a handset that was literally a style statement. Almost everybody said that this is the best one can have until BlackBerry came along. Just when almost everyone was convinced that BlackBerry is the ultimate in mobile handsets, Apple came out with the iphone and today the latest model is iphone7 and people are waiting for the 8th version.

The only constant is change. As I mentioned in my previous post as well, today technology will help automate a lot of tasks and improve productivity. However, the industry needs skilled people who will make this technology possible. There is a fantastic movie featuring George Clooney and Anna Kendrick called "Up In The Air" It is a classic case that portrays how and why human resources still make such a difference. And for the experts who keep harping about the ability of AI being superior, it is worth watching Minority Report. The movie very nicely depicts why we cannot be 100% sure about AI

To summarize, technology disruptions will keep on taking place. As long as one has the ability to upgrade and re-skill, one should be fine. Don't be pessimistic - be optimistic as there are so many avenues that are going to open up and the fact is that we have a lot of jobs and opportunities that need people. This is going to be my next article in this series - so stay tuned. Just remember the keyword "Transferable Skills"

AI/Robotics/Automation - ITEmployees Cry Foul - Part1

Now that I have given my medium term outlook about Nifty, I will be spending the next few posts specifically addressing the sectors that are currently under pressure. There is so much being put out in different forms of media with some common keywords - automation, Artificial Intelligence (AI), Robotics, job losses.

For the common man, Robotics and Automation imply that tasks that can be performed by a machine with minimal human intervention. It is not as if robotics and automation came just yesterday. Automation started right from the time we had the industrial revolution! Two simple examples; imagine what happens when a Godrej storewell cupboard is being made (this is a common example I use in my lectures) We need sheet metal cut into different sizes according to where they will fit in the structure of the cupboard. Once upon a time, the entire cutting process was done by human beings. The challenge was that the productivity levels varied a lot and the quality levels varied a lot. Today we have a machine that cuts the sheet metal. Human intervention is needed to basically tell the machine - cut the sheet metal of this size. Another human intervention is to make sure that the supply of sheet metal is in place and once the cutting is done, take out the cut pieces. Advantage: What perhaps would take 100 human beings 100 hours to produce is now done by 1 machine in less than 10 hours. The variation in quality is extremely limited. Today there are millions of tasks in manufacturing and services where machines can easily replace human beings and perform a lot of tasks with minimal human intervention. Similarly in a financial services environment, a lot of accounts reconciliation can be automatically done by the system at the click of a button.

Anybody who says that automation is bad because we need to keep the jobs is akin to saying don't deploy machines to make the road or for that matter don't give the workers shovels. We need to keep the jobs so let them use spoons and ladles to build that road - lifetime employment. Is that what we really want? Yes I agree that there are some sensitive aspects where even if we have the option of an automation process, we perhaps should not allow automation because of security issues. A common example of this is drones for package deliveries. We know that it is in fact a fantastic innovation that looks great on television. My concern is that what do we do if some idiot misuses the technology and ships a bomb?? Air Traffic Controllers all over the world are already stressed with the tasks of managing airplanes and choppers. Imagine the scene when they have dots all over their screens because of these drones. Unless these security concerns are adequately addressed, perhaps we are better off keeping this innovation in the laboratory.

Artificial Intelligence is exactly what it says - the computer uses some sort of a program to perform analysis. We need to understand a key thing here - the system becomes intelligent only after some human being tells the computer what to look for and how to do the analysis. This is precisely the reason why the IT/ITeS industry in India is negatively impacted and job losses have begun. A lot of work that was earlier done by IT/ITeS employees by people are now being automatically done by the very computers and programs that have been created!

We need to understand one thing very clearly - India has grown significantly because of IT/ITeS companies but India has not contributed significantly to innovation in this very segment. All that India [and in turn the industry and people] has done is worked on the price advantage. Even for the basic computing tasks, if it costs USD 6000 / month in US [Monthly CTC for 1 employee] it costs USD 2000 / month in India. That is the reason why companies started laying off people in countries where salaries are high and gave those jobs to Indians. How many kinds of software innovations have been created by Indians in India? Google, Facebook, Microsoft etc etc etc were not India's contributions. Once that program was released, what Indians did well was fixing bugs and glitches. Now there are superior technologies that don't need so many people to fix these things.

We need to realize that automation is going to happen in many areas of manufacturing and services forever. What is important is that to get these automation techniques working, you need to be extremely smart and talented. The basic problem with a vast majority of Indians is that "smartness" and "talent" are rarely found. Yes thanks to an education legacy that the British left behind, we have a lot of English speaking graduates and post graduates but degrees do not imply "smartness"

So whether we like it or not, automation will continue and an employee is not smart enough to create and manage automation, s/he will eventually lose the job. Another question that then comes up is why do companies don't take initiatives to re-skill people. Human Psychology has shown that the greater the degree to which a person is used to think and do things a particular way, the greater is the challenge to make the person change. The old patterns and attitudes tend to be so deep-rooted that the unlearning process itself is a big challenge. And when you have so many young people joining the workforce - with fertile minds that can be easily trained, companies will take the easier option.

A lot of people complain that they are getting fired because they are not young enough, that is a wrong judgement. People are not getting fired because they are old but because they are not good enough for the new challenges. The people who stayed ahead of the curve and were talented enough are still being rewarded. And let us not forget that when the IT boom started, these very employees grew at the expense of employees elsewhere.

To be continued

BULL MARKET THAT WILL DOUBLE AGAIN OR RECESSION???

Over the next few posts, I will be focusing on the gloom and doom part that has been hitting the newspapers, social media to the extent that there is some ITeS Union as well that has come in. I will talk about those aspects later. First, let us have the Nifty perspective in place.

I have seen a couple of bold comments like Nifty will double again from current levels over the next 5 to 7 years etc. foreign investors are still bullish on India etc etc etc. My take - we have been in a structural bull market since 2013 [some of my more experienced peers say from May 2009 - ok I buy that] Through Twitter, I had mentioned last week that a close below 9450 would be initial signs of weakness. My number is 9480 to be precise and I will be watching out for that this Friday as well. If the close happens to be below the 9450-9480 zone, it will be a confirmation of short-term weakness.

Another aspect we must not forget is that the dynamics of Nifty have changed significantly over the last 10 years. Earlier, Nifty was largely sensitive to Reliance, L&T, Tata Steel but that has changed. Some intelligent analysts renowned in social media have also been pointing out the same. Let us review the current Nifty 50 snapshot as of this week

One may review this file that can be opened with this link

I have taken the top 15 companies by relative weightage contribution to the index. With the telecom consolidation and volatile environment in IT/ITeS sector, some pain is on the cards. I have qualified the impact of recession on that particular stock. A careful look will tell you that the most severely affected firms are IT companies and banks. We need to understand one key thing; when we take the downward impact of IT/ITeS sector, the re-organization drives at telecom companies post Jio and the impending consolidation in the banks, the net impact in terms of affected persons would be at least 15 million [1.5 crore people!] What we many a time fail to realize is the multiplier effect. Every 100 direct jobs added in the IT or Telecom sector also added about 30 jobs indirectly.

That being said, I also disagree with the nay sayers who are predicting gloom and doom. There was so much panic and gloom in 2008 when the blood bath started and Nifty rapidly fell from 6357 to 2252 within a span of a year. From that point, Nifty scaled 6338 again, went all the way down to 4500 and hit 9k levels. From there it came all the way down to 6800 odd levels and now we are near record highs yet again. I do foresee a correction to about 6800-7200 levels once.

One key reason for my alarm bells on an impending correction is the market breadth. There is a divergence in index levels and overall market breadth. A few select stocks are taking the indices higher while a lot of stocks are actually going down. The distance from peak levels for a lot of stocks suggest a distribution pattern. The way mutual funds are advertising the SIP route with emotional appeal, my suspicion levels are inching upwards.And as I always maintain, corrections are good for the market and healthy too. I am particularly negative on the banking sector at the moment. The unsecured credit that is at risk at the market is near record highs. The aspirational young Indian is highly leveraged and by the time the restructuring exercise hits its peak in sensitive sectors, NPAs will be severely on the rise. For the first time perhaps in Indian banking sector, retail segment NPAs will outpace the business segment NPAs.

That being said, it will not be the end of the world. After dot-com, we had doom predictions; after Lehman Brothers, we had doom predictions. The same will happen again. The so called pundits and media spokespersons have selective amnesia and wrong anchor points. Even if we have a 25% correction from current levels, the markets will be way higher than they were in Jan'08 or Nov'10

In the next few posts, I will be discussing not markets but industry analysis and future prospects for people affected by organizational restructuring. Stay tuned and enjoy the ride

Outlook For FY18

Dear Readers
It has been more than 15 months since I last posted on this blog. Going in for a recap, the markets shrugged off its fear and moved on to scale new highs.

I had indicated that base metals and banking stocks would lead the rally and that happened. However, the gigantic leap that the indices have taken was definitely far beyond my expectations.

As I always keep saying, history has a hidden engine and can reveal patterns. For all practical purposes, the bull party for now is in this last stage for now. Going back to the 2010-2014 pattern, Nifty had peaked at 6338 in Nov '10 and then went on to touch 4550 levels; from here it scaled 6415 to fall to 5200 levels in Aug '13 and then came the big bang rally with BJP taking in power.

Without taking any externalities into account, a pure pattern extrapolation gives me the following picture

A top around 9338-9357-9415 levels for now with the technical bottom set at 7800 levels. IMHO, Nifty will retest these levels over the next 18 months before resuming the next major leg up. That leg will coincide with the May '19 election outcome. Assuming status quo, the BJP is set to win the next election as well; should the same happen, the new high on Nifty will be in 5 digits; [10425 is my target on Nifty and 34500 on Sensex]

Most of the trend experts also agree on the same; the only question is the timing. A large section of analysts believes that the 5 digit mark will be surpassed this year as well. Though not impossible, I have my reservations. [Reasons will be covered later]

The reforms on the economic side have been largely positive. A lot of revenue leakages in the PDS have been plugged due to use of Aadhar. The exchange rate has strengthened but my contrarian view is that the dollar is headed to an exchange rate of 72 vs rupee and hence its time to go Long Rupee-Short Dollar

The demonetization drive is a positive for the very long term. A lot of people are harping about the positive effects of GST roll-out but we need to be pragmatic. The positive aspect of the GST is that it will greatly change the supply chain and distribution networks. The number of warehouses and distribution centres will drastically come down and generate economies of scale. Coastal shipping will see a big bang [albeit positive] explosion; the pilot successes that we are seeing right now are a tiny fraction of what the real game will turn out to be

On the downside, I personally do not view the GST as a big success as the media and government are portraying it. If we look at our Asian peers that implemented GST/VAT [Thailand and Singapore are my role models for the same], they kept the rates at 4% to 7% [except for items tobacco products, liquor etc]. The whole idea of GST/VAT in a country is to keep as low a marginal tax rate as possible and have a tax net as wide as possible.

For instance, a standard FMCG supply chain would be
Factory -> Distribution Centre -> Super-Stockist -> Stockist -> Point of Sale
In the conventional GST / VAT setup, when goods move from factory to the point of sale, each time ownership of cargo is transferred, GST/VAT is applied to the value of the sale. When the tax rates are kept in low single digits, the incentive to cheat on taxes greatly diminishes. Rather than forge account books, hire a chartered accountant, hide the cash somewhere else etc, the entity in the supply chain decides that it is better off paying the low taxation rate.

The stated purpose of India's new GST regime is that the tax evasion must be curtailed. Sorry Mr. Arun Jaitley and team, your new GST proposal does nothing to remove the threat of tax evasion. Every time this issue is raised by the media, the government offers a rebuttal saying that demonetization was implemented in parallel; fine that was for the tax evaded earlier. Earlier, the evaded tax was hidden in denominations of 500/1000; now the same will be done with the 2000 rupee notes. If we want to genuinely widen our tax net, the marginal rates of taxation should be extremely low barring a few products.

One of the most positive developments in the Indian banking space is the merger of all subsidiaries of Statebank into one single unit. However, this is just the beginning. What now needs to be done is a massive restructuring with more automation, rationalization of headcounts and branch offices. It does not make sense to have 8-10 small branch offices, all displaying the new SBI logo. That is just a cosmetic change; unless there is a complete overhaul of the backend, people won't receive the intended benefits. Another major positive of this exercise is that it sets a positive for other PSU banks to carry out a similar exercise. Rather than many small/medium sized banks, India needs a few large scale banks.

For the securities market as a whole, a major positive has been the rise in SIP collections of mutual funds. The advantage of SIPs is that one can reap benefits of crests and troughs of the indices and still come out on tops [of course the fund selection is critical]

From time to time, people in my network ask me why I ask them to continue with SIPs if I have a conviction of correction; the answer is simple - nobody can predict the market with certainty. By keeping an SIP with constant fund and variable units, you can take advantage of both peaks and troughs.

From a stock specific perspective, base metals and commodity stocks have generated 300% returns or more in the last 18 months. Hindalco had its old great wall of support at around 210 levels [pre-2010 levels]. When this broke down with conviction, it went all the way down sub-100 levels also. Hence I see a very good chance that Hindalco is on the verge of topping out. Similarly for Tata Steel, going beyond 625 is challenging.

IT segment will be subdued till the new laws are fully clear with regards to outsourcing. FMCG will be sluggish due to the onslaught of Patanjali. Whilst the markets are looking at the positives of banking sector, the cleaning of balance sheets and resource rationalization will come with its share of negatives.

Global Uncertainties
The picture post-Brexit will only be clear after the UK elections in June. It is a positive for UK citizens but we can expect a lot of turbulence from the Euro-zone in 2017. The EU has a succession planning challenge unless the countries decide to go ahead with an extended term for Merkel. The threat of a Euro-zone blowout still looms on the global economy. The situation is "Who will bell the cat"? The entire PIIGS fraternity wants to opt out but no country wants to be seen as the first to do so. UK managed to do that because it has its own currency GBP. That being said, such downsides on the economy will be short-lived. Eventually all countries will bounce back. I have always maintained that currency devaluation eventually brings out a lot of positives. When the Asian Tiger currency crisis took place, a long-term development was that a lot of people started taking vacations to Thailand, Singapore, Malaysia etc. The revised exchange rates favored the same and there have been numerous instances when a Mumbai-Singapore or Delhi-Bangkok flight ticket has been cheaper than a domestic sector. The day is not far when we will be taking vacations in Greece, Italy Ireland at almost the same cost as we do for Singapore!

The real challenge will be the geopolitical stability over the next couple of years. There is a strong correlation between a Republican president coming into power after 2 consecutive terms of a Democrat president. Almost every time this has happened, a major terrorist attack follows within 12 months and wreaks havoc. What we are seeing now in wake of Trumpism is just the tip of the iceberg. There is a very strong possibility that we will see a repeat of 9/11 soon.

Nevertheless, we can take it in our stride in India at least. The longer term trend is positive. If the current central government keeps its momentum and follows up on the measures, a 2nd term is almost a given. If that happens, then we can see the dream of Nifty breaking the 5 digit barrier.

Happy Investing - focus on largecaps now

Outlook For CY 2016

Belated season's greetings to all. Due to personal reasons, I could not update the December post on time. This post not only aims to give a perspective for Jan '16 but overall for 2016 as well

The Nifty opened 2015 at 8272 and ended 2015 at about 7950. The high was almost 9100 and the low was 7540. In statistical terms, this effect is called regression to the mean. 2014 was an outstanding year with gains exceeding 40% on both index level and stocks were a different ball game all together and midcaps were roaring. After such a fantabulous 2014, it was fairly logical that the index will take some time to pause [The normal 5 year trend on Nifty is about 15% to 20% CAGR]

We see this all the time in day to day life as well as specific sectors in the industry. Sometimes core manufacturing is the darling of the market and IT lags behind or sometimes it is the other way around. People are talking about GST kicking in and benefits due to accrue etc but most of all that is already in the price. The commodity crash has been severe though India has not been able to reap too much benefit due to significant rupee depreciation against the dollar. 64.25 was a firewall breach and 60 is the new 40 [in the 2008-2012 cycle, 40 was the base when breached first assaulted 44.25 and then 48.25 finally finding an interim top at 52.25]

Even before I get to the specifics for Nifty, I must mention that commodities are in their last phase of the downturn. The dollar index has in all likelihood topped out for now and will make a slow retreat towards 85 levels and that will boost prices. Crude almost always works around a weighted average price of 65 dollars a barrel in a 5 year cycle. That was the reason why I was bearish on crude when it was in 3 digits in dollar terms and was anticipating a move towards 65 last year. However, the accelerated fall after that was certainly not anticipated and I can stick my neck out and say that it is not sustainable.

The cost of production itself in most countries is almost 30 dollars a barrel whilst in regions like North Sea, it is much higher than that. Fundamentalists can talk all sorts of BS about fracking and demand slowdown but it doesn't cut ice. Then there are conspiracy theorists who talk about prices being artificially kept low to tackle Russia, IS etc etc and that also is BS. Prices will find their way up and we should soon be looking at crude hovering around the 65 to 75 dollars a barrel mark.

For the base metals as well, prices are in the last phase of fall and the only way is a gradual upward move. Note that upward moves take much longer as compared to falls.

Let us start with Nifty first
Nifty typically has its cycles timed as per general elections. We saw that when it made a top of 6357 in Jan '08 [a bull market uptrend that started with UPA 1]and the technical bottom for that was around 3900. The Lehman brothers crisis took it to almost 2250 levels and prices quickly bounced back towards the technical bottom. May 2009, UPA 2 comes into picture, QE1 comes into picture and Nifty again made a top of 6339 in Nov '10.
The corrective phase continued for a long time, a bottom finally formed at 4550 odd levels and the fresh upmove began. The next major phase of  upside came post-May '14 when NDA came into power again. Time and again Nifty has proven to go through the general election schedule with large moves coming when a new powerful government assumes office and then go through a corrective phase in terms of price as well as time.

I think that is going to be the case again this time and whilst there will be a lot of quarterly swing peaks and troughs, I have my reservations as to whether Nifty can make a fresh high in 2016. Its all about individual stocks for now and based on my commodity evaluations, stocks with core commodity products are the ones that have the highest alpha factor i.e. gains in these stocks will most likely outperform the index by a huge margin over the next couple of years.

The problem with most people in general is 'wrong anchoring'. Most people have anchored themselves against the 2014 performance and are feeling jittery about the way markets have panned out in 2015. Also, the index level is masking a critical fact that there are a lot of stocks that have corrected upwards of 20% to 30% in 2015 and hence a weekend review of the portfolio shows blood red returns. On the other side, the IPO market is booming with gains upwards of 20% to 40% on the day of listing. Whilst our television anchors are cheering that and business writers are gung ho about the arrival of the retail investor market, I would take this as an alarm bell.

Although I did not participate in markets till 2011, the signs that I see are ominous. Every possible red flag is being ticked on my fundamental radar
IPO market boom: The 2005-2008 period saw an IPO boom. Stocks were valued like crazy; remember the like of Shri Renuka, Educomp, Suzlon, DLF, HDIL etc etc? Where are they today? It was on the basis of these stocks that trade pundits had signalled the arrival of the new age of retail investors. Most of them vanished by 2010
There is a strong correlation between retail investors entering the market with imaginary clubs and swords to conquer their way to wealth and then see the market correct big time. [Statistically, only correlation can be established not causality]

Then there is this frenzy about anything and everything digital and online. We saw what happened in 1999-2000 with the dot com bust. Anything and everything with a dot-com was valued in hundreds of millions and billions. Then came the big crash. This time, a lot of people are talking about how it is different and we are looking at an app-based mobile themed users, better awareness etc etc etc. Whilst I totally believe that technology is an enabler and that it can help us do many things with minimal effort, I am not convinced about the crazy valuations being attributed to the firms engaged in this business. We have already seen what happened to Zomato, Tiny Owl, Housing etc.

For every Flipkart or Snapdeal that is successful, there are at least 90 other failures out there. Last but not the least - all support services and businesses like retail, facilities management, capital markets are fundamentally dependent on core industry performance. Unless brick and mortar businesses do not thrive, there won't be a financial economy for services! Another thing that is bothering a lot of 'fundamental analysis' experts is that why are stocks going down when low commodity prices are not triggering a gain for stocks as margin expansion is so very evident

There are 2 parts to answer this question
1] Markets discount the future well in advance; most of the perceived gains by low input costs were factored in stock prices well in advance

2] Velocity of Money: Remember that at the end of the day, all major commodity settlements [Gold and Crude Oil being the highest] are done in USD. The low oil prices and relative dollar strength have depressed significantly due to the commodity price crash. The lesser the dollars flowing through the economy, the lower the liquidity in the system.

Although it sounds counter-trend but money flow is very critical to prop up markets. A lot of positive returns on stock and bond markets have been already deployed into real estate globally. The lower commodity prices have taken liquidity flow out of the global economy like a sponge that absorbs water. Remember that both governments and banking systems are heavily dependent on commodity prices. The oil revenues maintain flow of dollars and are an easy source of tax revenues for governments. Oil exploration being a capital intensive project means that debt levels of upstream oil companies are significantly high. A large chunk of recent loans were raised with expectations of oil not breaching $75 dollars on the downside. With the current oil prices, firms are not able to breakeven on their variable costs; forget taxation and debt servicing.

So for fundamentalists who expect lower oil prices to fuel the economy, its not going to happen. And time and again I would like to remind readers that we have been through this commodity price crash. 2001 was the lowest point for commodities and so was 2008-2009. Neither the bonanza of upside can continue uninterrupted nor the gloom at the lower end. Last but not the least, certain minimum prices of commodities are vital to keep liquidity in the government, banking systems and also for jobs

Now let us come to Nifty and BankNifty

Nifty has very strong support in the 7200-7400 as rightly pointed out by a lot of experts. Now some of the top notch experts have been calling for 6900, 6600, 6300 etc. Whilst I cannot say with certainty that it will not happen, that would be a Black Swan Event. There are a couple of experts who have rightly likened the correction to that in the 2010-2012 period

Recap: Nifty made a top of 6339 in Nov'10 and went into a corrective mode. The large moves unfurled as follows
6339-5690-6181-5177-5944-5196-5740-4728-5400-4531 over a period of 13 months from Nov '10 to Dec '11
[13 months of correction]
Also note that barring a few large swing sessions in either direction, bulk of this correction period was actually spent in a range of 5400-5600

Nifty and BankNifty Charts [AND A SENSEX WEEKLY CHART FOR AFFIRMATION]

In the current scenario, Nifty topped around 9100 levels in Mar '15 and has been making lower lows and lower highs. Based on similarity of patterns, I am inclined to believe that 7200-7400 [give or take a few points] is the most likely technical bottom for now and corrective bounces are likely from here.

In terms of time, 13 months from all time highs will be in mid-April
Now recoveries may take time as moving up is always difficult compared to moving down. I also do not believe the contrarian view that we can see a fantastic year for equities and old highs will be taken out etc.

For those who are crying bearish; the last time we saw USD-INR in the 68 price range was in Aug-Sep '2013. Nifty was at 5100-5200 levels at that time. Today it is at 7200-7400 range
It all depends on where one is anchored
The bond markets and banking liquidity is largely a factor of confidence. At the same pitiable USD-INR exchange rates, current index levels are much higher and that speaks for itself. The problem with the bears is that they are anchoring themselves in the 8600-9100 [and perhaps a lot of retail investors too as they tend to buy at tops]

On the other hand, there are some leading stocks that are back to price levels when Nifty was correcting earlier in the 2011-2012 period
SBIN - From highs of 3200 in 2010 came all the way down to 1500 levels but spent most of its time in the 1800-2200 range

Taking into account the 1-10 stock split, it is exactly doing that now

Tata Steel: It did not break 195-200 range on a weekly basis in the previous correction. Right now also it has shown no signs of breaking down below 200

So what do we really expect for 2016 here on now that Jan is almost over

The Bear Camp: Shankar Sharma, the Big Bear of India [who rightly called the crashes earlier as well] has said that we must not rule out Nifty retesting the old top of 6338-6357

The Bull Camp: Mahendra Sharma, a perma-bull has called for a Nifty top of 9500 in 2016

My humble 2 cents
Barring Black Swan events, I neither see any significant downsides from current levels nor do I see any new highs being made. My unequivocal stance is that things are not as bad as they are pointing out to be nor things are as hunky dory

In terms of price we may have bottomed out for now or maybe - just maybe have one more flick down before starting a counter-trend rally to the larger correction of 9100-7200
A minimum 61.8% upside will mean that we should be able to visit 8200 levels over the next 6 months. Barring some large swing sessions, we are likely to trade in the 7400-7800 range [lowered from my earlier range of 7800-8200 based on current price action]

The large upside trigger in the short term for India is the Union Budget and GST
Another major trigger will be the USD-INR exchange rate
Time and again I have mentioned in my tweets that 64.25 was a firewall breach.
Now, the faster we move back to 66.25 and ideally 64.25, the faster will be the recovery in indices

FMCG will not be that big a game changer now as it was earlier
Patanjali has made great inroads into rural markets where it has a dominant price and perception advantage. Also the entry of Patanjali has sparked off volume, price and margin contractions on the urban front. So yes FMCG is still going to be a safer haven but the rate of growth will be much lower and slower

Likewise for pharmaceuticals, they will be safe havens but with price controls coming in, the best return days are history

Another thing that one must be cautious about is the stupid commentary that is doled out on tv. Every now and then, there will be an expert talking about 'delivery based buying' and 'delivery based selling'. I have covered this point earlier as well and will repeat it; delivery based can be a large transaction only. If a large delivery based buying has taken place, it means that somebody has offloaded a large chunk of holdings. Unless there is stock available in the market, how can one complete a delivery based transaction?? Similarly, if delivery based selling has happened, somebody has offloaded a large chunk and the transaction is through, there have been buyers. Delivery based volume always is 2-sided i.e. there is a buyer and there is a seller.

Yes delivery based values are critical as it gives an indication whether the security is really changing hands for good or one is just using the leveraged system to trade. At approaching bottoms, usually delivery based transactions gain steam. At major tops, it is rare to see large volume transactions as the big fish like to slowly distribute and palm off their holdings.

'Never ever let yourself be misled by commentary about delivery based buying or delivery based selling has taken place. It is just a high volume delivery based transaction with willing buyers and sellers' [Who is smarter of the two, that only time can tell ;)]

For traders, this is a good time and to gauge medium term trend, one good indicator is the Stock PCR based on FnO BhavCopy released by NSE at EoD. The index PCR is largely a lot of noise as there are crazy option contracts for far strike options on both call and put sides. Stock Options being relatively illiquid in India with only select stocks having large volume transactions on both calls and puts

The piece below is what I use for getting some clue on swings based on Stock PCR
<0.48 -> Bearish. Smart money is betting big on the short side of the market and are transacting heavily on the call side to protect themselves. Note that even the large market players can't predict which way things will go due to numerous uncontrollable events. With the power of big money, they can build short future positions, buy in the money calls and short out of  money calls

Between 0.48-0.54: Rangebound and sideways. In this range of Stock PCR, on a daily basis, one may see a large upside day or a large downside day. However, extrapolate on the weekly basis and one can see that actually the market is not going anywhere big time.

Between 0.55 and 0.62: Bullish - this usually happens when markets are at extreme lows on multiple time frames. Smart money is bottom fishing and buying big time. They are buying in the money puts in abundance to protect the portfolio. Like the bearish case scenario, the risk-reward starts favoring the long side

>0.62: Bearish At such large levels of stock options, it is extremely bearish. Even smart money is in panic mode and is desperate to protect the portfolio and minimize losses

Note that these are some guidelines I use basis some inputs from a very good friend. It is not a bible and not cast in stone. If one observes the falls that started in early Dec '15, large downswings started from the day Stock PCR hit 0.68. Just when things were beginning to look good with retracements of falls, Stock PCR nudged towards 0.45 triggering the next major fall.

This is just one cursory indicator - the main paramters will always be Price, Volume, Time and technical indicators like MACD, RSI. However, Stock PCR does help to keep a nimble approach. And the fact of the matter is that almost 50% of trading days are in range-bound sideways trades!

Now one of the critical questions is what to buy???
This is a time to be stock specific and some stocks are in sweet spots for accumulation

SBIN - 140-180 is accumulation zone for targets 300+
ICICI Bank - 150-225 is accumulation zone for targets 400+
Axis Bank - 250-350 for targets 600+
Tata Steel - 150-250 for targets 350+
Hindalco - 50-80 for targets 150+
Cairn - 80-150 for targets 250+
ITC: 270-320 for targets 425+

Note that these are on a longer term basis with a 3-5 year horizon. There are many more that I will keep posting through Twitter. Also note that I have personal holdings in some of the counters mentioned and have advised people in my network to consider accumulation in the given counters


So enjoy the roller coaster ride of 2016
There will be some more updates on the basis of Statistical correlations that I will post in the first week of March post-budget

Outlook For November 2015 / Diwali Updates

Well October was quite lackluster in many ways. The much awaited relief rally did come through and stocks spent most of the time in narrow ranges. That is precisely how markets behave. August was sharply down and extended that to some extend in September with some smart recovery towards the end.

Going by the law of averages, November-December period should be pretty exciting as far as traders are concerned.

On the downside, 7925-7980 levels will be critical prior to Diwali. As long as these levels hold, we should have a build up for Mahurat trading that I am personally optimistic at 8625 odd levels [or 8400 levels towards 200 DMA at least technically] Wherever the relief rally ends there would be a correction after that. The correction can be deep or shallow and that depends on multiple factors.
A simple correction would imply a retest of the 7500-7600 levels from where the next leg up should take place. There is a minor possibility of a sharp correction towards 7200 levels and that can be easily determined by the Rupee-Dollar exchange rate. In the August-September period, I had updated via Twitter that breach of 64.25 in USD-INR implied a firewall breach and that is exactly how things panned out. To the extent USD-INR stays above 64.25, rallies on Nifty will get sold into. The more time USD-INR spends closer to 66.25 levels, the greater is the danger of correction not stopping at 7500-7600 levels and going below.

However, we should take things one at a time. Until Diwali AND to the extent 7925 holds, the risk-reward is in favor of buying. The Diwali rally should be used to liquidate some of the portfolio holdings as well. Post Diwali, if the negative indicators listed above start popping up on the screen, some shorts can be initiated.

Critical Levels at different timeframes as of now [All values at end of respective time-frames]

Daily - Bearish till below 8080 [Apprx]
Weekly - Bearish till below 8180 [Apprx]
Monthly - Bearish till below 8280 [Apprx]

However, a short term Diwali pataakha is on the cards IMHO

Fundamentally, we should also note that a lot of FIIs have book closing scheduled for December [Most developed nations follow the calendar year as fiscal year unlike India that follows an April to March period]. So there will be profit booking across emerging markets to plough money back to the parent firm, pay out Christmas bonuses, repatriate profits etc. This very much falls in line with the technical outlook as well. With the current USD-INR rates, we also need to remember that it is far less rewarding to repatriate money from India and this augurs well for a moderate correction. After that will come the Santa Rally into New Year.

Taking fundamentals and technicals both into account, we have the range pretty well defined

Optimistic: 8025-8625-7600-8200 for Nov-Dec combined
Pessimistic: 7925-8425-7200-8000 for the same period
[Day to day fluctuations will keep varying but the broad script will go on these lines IMHO]

From a fundamental perspective, what are the positive triggers for the markets???
The GST implementation will be a major positive trigger even if it say starts with 5 or 6 states on a pilot basis. It will provide steroids to the market

The USD-INR exchange rate - if things work in favor of rupee dollar and it manages to reclaim 64.25 or lower levels [i.e. gets stronger], markets will go in favor of bulls

Major negative triggers
Most of the standard negative triggers have also been factored into the price
Rupee Dollar, Euro-zone stability, oil prices etc

The other negative triggers will be in the form of Black Swan events that nobody can predict and have to be taken as and when they come

Statistical Correlations
There has almost always been a statistical correlation between 2nd consecutive term of a US president into his 3rd year and a sharp correction. We are into that phase at the moment

The technology stock mania. Whenever asset bubbles have emerged to alarming proportions in the technology space, markets have tumbled. It happened in 2000 with the dot-com bust. Now we can see crazy valuations creeping back again in the hi-tech space. Don't get me wrong - I am all for technology and productivity improvements, Whether it is booking tickets over an app, reviewing restaurant reviews, buying books / gifts online, hiring a taxi, the e-commerce wave has significantly improved time and resource management. These technologies are here to stay and become part and parcel of daily life. What is alarming is the crazy valuations and a mania surrounding the same. Survival of the fittest will come through and initial partners exiting businesses will come through and at some point of time, the sweet music of funding will stop

Food tech apps are already feeling the heat. Zomato with a billion dollar valuation had to lay off 300 employees???

Let us be very clear on fundamentals - whether it is speculators / investors in the stock market, banks or technology enabled businesses - they thrive on real businesses i.e. the brick and mortar businesses. Whether domestic or international, there has to be on the ground action for manufacturing, capital goods, infrastructure. Only when these businesses move on a sound footing will other support functions thrive. The masses in general need to have disposable income to allocate higher spends on cars, movies, shopping etc. With rising education, food and housing costs, disposable income is actually on a downtrend. The weak commodity prices are a boon for some companies but bane for most manufacturing units.

Without a robust economy in place for brick and mortar business, things will never be on track. 2015 has been a painful year for the entertainment industry with significantly lower footfalls / collections. That just goes to show how sceptical mass psychology is. Social mood is not so optimistic given the fact that low commodity prices have hardly affected disposable income positively. Crude prices crashed over 50% but the transmission to consumers has been less than 20%. The commodities where demand is inelastic [pulses, cereals, grains etc] are seeing prices go through the roof.

So coming back to the investment themes, as I have been repeatedly saying Gold and Silver are actually fantastic themes to get into. When we look at the longer term trends and adjust for inflation and exchange rates, precious metals tend to have a 13-3 cycle. 13 years of a bull run followed by 3 years of correction. We are approaching the end of the 3rd year and gold in dollar terms will start appreciating by 10% PA pretty soon

Crude is a wonderful investment vehicle. The challenge is that one has to go through MCX. I would strictly advise against leverage although brokerages encourage that. One can take longer term contracts on the basis of liquidity and keep going for the mini lots. In dollar terms, a bottom is almost in place and in 12-18 months, we will be staring at WTI Crude above 65 levels if not more IMHO

This is a good time to book profits in Stocks / Mutual Funds that have delivered good returns and convert to these themes. Real Estate, a sector that has been languishing due to abnormal pricing and excess inventory is now looking attractive. Prices have started showing reasonable correction and builders are doling out offers. From city to city the dynamics change and one would have to consult local experts for the same.

So enjoy the festivities and remember that the blue chip names that are lagging behind are the ones that will end up giving the 'alpha returns'. Stay tuned to the Twitter feeds for regular updates 

Outlook For October 2015

Well September again was full of volatility where in we saw a retest of lows made in August and a subsequent pullback. There was one major gap between 8225 and 8025 that has almost been filled.

Initially, prices may be pushed back from 8225 levels towards at least 8025 and maybe just maybe towards 7800. We will have to observe how prices pan out. Lets analyse the time-frames, current status and trend changing levels as on 6th October '15

Daily: Bullish [Trend Changer = 8025 apprx]
Weekly: Bearsh [Trend Changer = 8025 apprx]
Monthly: Bearish [Trend Changer = 8325 apprx]

October is a month with a lot of holidays in between and a 5 week long expiry series. Historical analysis points to the fact that 5 month series on Nifty tend to have a larger range [almost 800 points] and the same can be expected to play out this series as well [just as was the case in August]
Direction is immaterial for now; the broad range is 7800-8225 and some consolidation is on the cards. A break of either of these 2 levels for 2 consecutive sessions will yield another 150-200 points in same direction.

For Diwali 2015 [around 11th Nov '15], we are looking at a target of 8625 [barring Black Swan Events] So in case we see steep falls in October series, they can be used to buy on delivery basis for a short-term momentum trade.

For the longer term, the commodities related stocks continue to remain best bets for the longer term. Crude has been consolidating around the 45 dollars a band and the worst case scenario can get the prices to 35 but it will barely stay there for 2-3 sessions and revert back to 45 levels. Prices of Steel, Aluminium, Zinc, Nickel etc are at multi-year lows and there is not much to lose in terms of value.
In 3-5 years time, the base metals pack will again be staring at the highs made in the 2010-2014 period [though not lifetime highs that are near impossible to gain]

The best bets in the base metals space continue to be Hindalco, Tata Steel, Vedanta, Cairn
IMHO, longer term targets are as follows
Hindalco = 150+
Tata Steel = 450+
Cairn and Vedanta will at least double from current levels

Why is the commodity space looking so attractive when all are looking at an abyss
1] When mass psychology is looking downwards, chances of the move in the opposite direction is far more likely!

2] From an Indian perspective, the commodity prices in dollars and rupee-dollar exchange rate determine final prices. Dollar index spiked from 75 to 98 from 2010 till date. Even a 50% retracement will ensure that Dollar Index moves towards 85-86 levels [closer to US Presidential elections] When the dollar index corrects downwards, dollar based pricing of commodities go up. Rupee Dollar has made its base at 60 levels now. So these factors put together will ensure that the recovery of commodity prices in rupee terms will be much faster over the next couple of years.

All said and done, India is an active consumption based economy keeping demand higher and hence inflating prices.

3] Like all securities, when steep rallies or falls take place, over a period of time, 50% retracement does take place technically

4] Based on practical experiences in the 2000-2003 period and 2008-2010 period, a lot of producers of commodities have already stopped production and the more prices fall, more and more producers will drop production. So market forces will levitate prices upwards

Another space that is slowly getting attractive is the FMCG space, especially names like ITC, HUL. They have had meteoric rallies and are now correcting both in terms of price and time. Over the next couple of years, we can see solid base building and perhaps doubling of stock prices from current levels over the next 5 years.

Have a profitable trading / investing month ahead. As and when some individual opportunities crop up, I will update the same.

Outlook For September Series

Well in the middle of the series the bears took an absolutely invincible lead over bulls. The larger trend for the month of August was UP with the stellar opening at 8450+ levels with an 800 points fall from there. There are multiple factors that are being touted China, crash etc etc etc.

Corrections are healthy for the market and the longer term uptrend is intact. Whilst a close above 8400 levels for the month of August would have been more helpful, I personally would read this as a false breakdown. Things should turn for the better at the end of September towards Diwali 2015.

The only point I would mention is that the breach of 7700 twice with conviction implies that a deeper correction is likely in the next 6 weeks. However, as long as the 7200-7440 band is intact, bulls have nothing to worry. The minimum upside target for Diwali 2015 is about 8600 or perhaps even higher.

NIFTY DAILY

NIFTY WEEKLY

BANKNIFTY DAILY

BANKNIFTY WEEKLY

As we can see in the Nifty Weekly charts, even in the severest correction, the long-term trendline has not been breached [currently between the 7200-7400 zone] and likewise for BankNifty [15500-16000] band. So we are almost there in terms of corrective phase. However, corrections have price, volume and time factors. This instance the price and volume factors have been high, whilst time has been short.

Falls in the current situation are great for buying on delivery basis, especially commodity linked stock prices. No matter how much the media pundits talk about the China factor, it has completed its boom and bust cycle within a 9 months. As far as base metals are concerned, there is enough inventory for about 12-15 months [the norm is 18-24 months inventory] and the dollar index is on the verge of peaking. It had a rally from 75 to 99 and a logical technical retracement would be about 85-87 levels.

The way commodity prices are shrinking, one has to wonder how much more will they have to fall? As it is prices have gone below costs for a lot of plants. The industry has been through multiple peaks and troughs. A lot of plants will be in cold-idle stage until there is a reasonable recovery in commodity prices. The US rate hike will be perhaps deferred for some more time till there is clarity on liquidity situations.

On the global front, I had mentioned earlier that there is a very strong correlation between the 3rd year-2nd consecutive term of a US president and global liquidity conditions [on the downside], as of now, the basic tenets have been entrenched. A relief rally towards Christmas is more likely as the risk reward ratio has tilted favorable for bulls over the last 4 weeks. A larger crisis is waiting to explode but that should happen about a year down the line closer to October 2016.

The longer term charts clearly show that the bull market conditions are in place. The longer term [3 to 5 years] targets are 9600 followed by 10200. However, such large scale movements take place closer to election years as outlined in the interim post. A close examination of Nifty post-2001 shows that markets open with significant gap-ups in the month of May of an election year followed by double zig-zag corrections.

How can we be sure that we are in a corrective phase??
Social mood - is a leading barometer with some more statistics as well
Movies, for one are showing not much signs of revival with low footfalls and more flops with even big budgets and mega-stars

A normally decisive government is faltering on key reforms and giving up on the very factors they were particular that there would be laws with teeth. [Land reforms, OROP, MAT for FIIs etc]

Housing inventories are piling up despite reducing interest rates and clear indications of higher rate cuts. There is an elevated level of advertisements in media for mutual funds and ULIPs that usually come towards market tops [albeit interim]. The only heartening fact is that this time, there are multiple prudent people advising SIPs and that is good. SIP is always a good route regardless of bull or bear phase.

Banking stocks have taken a strong beating in the last 5 sessions but there is only 1 last leg of fall pending, barring Black Swan events. From an EW perspective, there are always at least 2 views valid at a particular phase [Medium Term in this case]

Bullish Phase: Correction is done with the lows of 7667 and the markets are headed higher. This means a minimum retracement to 8325 levels or more. [Gets invalid below 7667]

Bearish Phase: Correction is still pending and the indices will head lower to the support lines shown in the graph.

In either scenario, the risk-reward ratio is in favor of buying on delivery basis for Diwali 2015.
As far as the longer term is concerned, I am reiterating the bullish stance and would like to remind readers that Nifty is poised to cross the 10k barrier over the next 3-4 years. As far as trading is concerned, one should exercise caution in FnO space in current scenario. Volatility / Implied Volatility are high and even a sideways move is sufficient to reduce option prices. On the other hand, with higher IVs, even a large move may not bring substantial difference to the options.

For futures, this kind of volatility can erode significant margin in case the position goes against traded direction. This is even more critical considering that soon, contracts will have new lot sizes that are higher and thereby increase risks. It is very tempting to look at the swift gains that can be made with the higher lot size, but greater the reward, greater the downside when the position goes against.

Unless one is a seasoned player with tight money management rules and discipline, the current phase is not conducive for options in the Indian market. It is much better to stick to buying the dips on delivery basis. Ignore the media as their job is to fill airtime with news. The same point will be used to justify the market move. Suppose BankNifty had started the week on a positive note after reduction in base rates from HDFC Bank and the news regarding too big to fail banks on India, the justification would have been that lower rates imply economic confidence and larger loan books etc etc etc. Since banking stocks have been hammered over the last 2 days, the excuse has been that lower interest rates mean lower interest income etc etc etc. So whether the prices move up or down, the same point will be used for justifying in a different way.

For fundamentals, the USD-INR exchange rate will be a critical barometer and the faster we come back to the sub-64.25 levels i.e. Rupee strengthening against the dollar, the faster will be the recovery for equities.

Onion prices are going through the seasonal spike and will reverse to normalcy soon. Overall inflation numbers are ok [though I don't agree with RBI's inflation measuring metrics] The way things are moving, a rate cut is highly likely before Diwali 2015 that will fuel the relief rally.

For September series, we have already got the strong moves in the beginning of the month. In a couple of sessions more, the volatility cooling effect should start with a range-bound market in between. Large moves in either direction with higher volatility will return to the market around 22nd September [Fall Equinox] and prices on 30th September will be most critical to determine underlying strength / weakness.

Happy Investing / Trading

Indian Indices Crack Over 4% - What Next???

Well the last 2 sessions have been sending shock waves across markets. Everybody is wondering what the hell is happening. The last time, such deep corrections at index level happened was in 2008-2009. In my tweets and previous posts, I had categorically mentioned that 64.25 on USD-INR would be a firewall breach as far as equities are concerned.

However yesterday's fall did surprise a lot and in all likelihood, there could be some steeper cuts this week. What was surprising was that a lot of media pundits tweeted "When the US market sneezes, the world gets fever" or something on those likes. Bull**** I say to them. It is not even an apple to orange comparison - understand this; the market capitalization of Apple [AAPL] is equal to the market capitalization of the Indian stock market [well almost]

We have our own cues and own technicals and fundamentals. Most of the major bad news have been put behind us; Grexit avoided [at least for now] and hence Euro-zone is stable. US Fed Rate hike will take a bit longer. Then comes the Chinese dragon. A country can't keep on growing at the same rate for perpetuity. The strong 7% to 8% growth posted for over a decade now have as it is more than tripled the country's GDP. Now the base effect is much larger.

Commodity prices are collapsing and in most likelihood are in the last leg of fall. Given current prices, cost of production is way below market costs. Most players will stop production as it will only amplify losses. So a recovery in commodity prices is the next logical step over the next few months [I have given my reasons vis a vis Dollar Index in my previous post]

Let us evaluate Nifty. Below are the Weekly Charts based on yesterday's close

Nifty Weekly

For Nifty, there are 2 swings to take into account

1] Swing from 5100 to 9100 [Aug ' 13 lows to the all-time high, rounded]

61.8% retracement = 6628 [Longer Term]

2] Swing from 6400 to 9100 [Last Major Swing High To all-time high, rounded]

61.8% retracement = 7431 [Medium Term]

The base building around 7400 levels has been well cemented from May 2014 till date. In the short term, I don't think we will go below 7400 levels [even with a sharp correction for now]

By Diwali 2015, we can expect Nifty to scale 8550 at a minimum [barring Black Swan events]

Given the volatility, it might be difficult to trade FnO unless one is seasoned and disciplined. However, SIP with 4 to 5 tranches in blue chips will be a good way to play the current fall.

Also, we need to look at the behaviour of Nifty on a larger time frame with fundamentals in place. The Nifty cycle is largely driven by the political cycle

First major life-time high was in Jan '08 [6357] and the same was fueled for 4 years with UPA 1 and the credit expansion with the US housing markets and advent of Euro

The technical bottom for the same was expected at 3900 but the severity of credit crisis post Lehman Brothers took it down to 2252 levels but within 6 months, the technical bottom was reclaimed

UPA 2 brought in the next major leg up with a significant gap-up and then we went on to retest 6338 in Nov '10. QE facilitated a major portion of the subsequent rise post May '09

Then we went to a corrective mode [6338-5691-6181-5177-5944-5196-5740-4728-5400-4531] from Nov '10 to Dec '11

There was a good rally as a precursor to elections 2014 and we saw a huge gap-up and lifetime highs yet again. Liquidity injections by ECB, BoJ and BoE helped despite Fed taper.

But can you observe a pattern over here? The large chunks of upside happen around the election year with stratospheric levels and then we get into a corrective mode. Corrections come with a combination of domestic and global factors. When the correction is driven by domestic factors, it is less severe in terms of price but longer in duration. When the correction is driven by global factors, even the deepest supports get breached in panic only to see things recover within a short time period at least to the technical supports.

Come on let us face it - markets will have swings up and swings down. India has had meteoric rallies over the last 2 years with the index almost doubling and individual stocks even tripling and quadrupling. I am not talking about mid-caps here but large caps.

Axis Bank, ICICI Bank, Kotak Bank, Yes Bank, SBI all have doubled tripled or quadrupled

Infosys, Wipro and TCS have more than doubled

Britannia, HUL, Dabur etc

LT, BHEL more than tripled

MRF, Bosch, Maruti, M&M have quadrupled

The heartening part of the rally this time has been the fact that blue chips have performed extremely well with existing business models [unlike Suzlon, Unitech, JP, DLF, ADAG Group etc that was the case last time] 

If we look at the Rupee-Dollar exchange rate, so far the correction has been less severe. In 2010-2011, when the rupee went from 48.25 to 52.25, the index shaved off over 30% in less than 6 months from 6338 levels. 

Bottom-line: Corrections are good and healthy for the market. Regardless of where the current correction ends, Nifty has a very high probability of reclaiming 8550-8600 levels [if not more] within the end of 2015 [barring Black Swan Events]. Use current corrections to buy on delivery basis in a systematic and phased manner. As usual, a well diversified way would be to buy Nifty Bees and BankBees. I won't recommend Junior Bees and Infra Bees as of now because they are still very expensive and are most fragile [When I had recommended these last time, InfraBees was around 180 a piece and Junior Bees was around 115 a piece. Currently these 2 ETFs are way above those prices]

On a longer term horizon, Nifty is well-poised to hit the 5 figure mark of 10k levels but that I reckon will happen only after the next election cycle.

Happy Investing