China - Meteoric Rise and Free Fall

Chinese markets hit multi-month highs within a short period of 6 months and have almost cracked 20% from recent highs within 2 weeks. Most Indian stock market commentators are busy harping on 2 points

1 - Margin selling pressure due to tighter government regulation [Partly correct]

2 - Money invested in China may be re-directed to India [Grossly Incorrect]

As usual, when the key objective of tv anchors is to fill in airtime and prove himself / herself smart, such loose comments are inevitable. Unfortunately, a vast majority of people end up following these very delusional anchors to find themselves on the wrong side of the fence.

Let me first put out a 5 year Chart of Shanghai Composite v/s Nifty from Yahoo Finance for a perspective 

The bold green line is the path of Nifty whilst the thin blue line is Shanghai Composite

Shanghai was down and out in 2013 at almost half the value of the earlier peak when all emerging economies were in their corrective phases. It stayed there for a very long time with elections due in South Africa, India, Indonesia and developed nations like Germany.

Remember that to a large extent, China pegs currency values and undoubtedly, it is the largest holder of US T-Bills and German Bunds as a sovereign across the globe. China was [and is still] trying to build on as a hegemony country of the East [Like US hegemony in the West]. The South China Sea dispute was a major factor of concern highlighted by major investment banks as well. 

Once the election tailwinds went out of the way and dollar strength started surging in second half of 2014, it started making a lot of sense for fund managers seeking 'alpha' returns that the Chinese market was one major pocket of opportunity. China is a major guzzler of steel, copper and zinc and base metal prices are down in doldrums globally for over 2 years now. Oil prices started cooling off and with Dow, FTSE almost near peaks, uncertainty in Europe and expensive emerging markets, it was no brainer that China was waiting to explode as far as fund managers were concerned.

The successful IPO of Alibaba gave things a positive fillip but this rise was too much too soon. Doubling of the entire index in 6 months and that probably meant tripling and quadrupling of some of the index heavy weights.

Statistically, this concept is known as "Regression To The Mean". In simple terms, it means that something that has been grossly overperforming / underperforming for a prolonged period of time will go contrary to that trend and allow averages to catch up. We see that with sales teams across sectors, thematic mutual funds and sectoral indices as well. [Law of Averages, as we say in cricket]

For instance, a sales team that consistently hits and exceeds sales targets for 3 or 4 quarters starts tapering and cooling off for a couple of quarters. On the other hand, sales teams that were down in the doldrums suddenly stage a comeback with good sales. Fundamentally there are many reasons for that but statistically, it is something that has been established well over time.

Let us take India itself for instance; In the 2005-2008 rally when we hit 6300+ for the first time in Nifty's history, FMCG and Pharma were steady overall but not rank outperformers. Cyclicals and Infrastructure was the buzzword. By the time the entire correction of 2008 peak corrected and we scaled 6300+ again in Nov '10, most of the stellar performers of 2008 were anywhere between 50% and 80% down. 2010 was the time when FMCG, IT, Automotive started becoming pet themes outperforming frontline indices and cyclicals [HUL was around 280 at Nifty Nov '10 peak and Asian Paints was around 350 (adjusted for stock split), Tata Motors hit lows of 125, Maruti 750 M&M 630]

From a global indices perspective, DJIA and DAX were rank outperformers in the 2010 to 2014 period. DAX rallied from 5750 levels to 11k+ levels despite the Euro-zone crisis; DJIA was at 10800 in Oct '11 and went on to scale 16k by end 2013. Nikkei more than doubled from 2012 to 2015. With all the After getting to these levels, the subsequent leg up has not been very inspirational. Euro-zone problems intact, massive QE, Shanghai was a rank under-performer in global activities. So what would law of averages indicate? It was time for the Chinese dragon to spit fire.

Early indications of the Chinese dragon waking up from slumber was the way it has been lapping up physical gold from the time gold went below 1450 dollars / ounce [and China has an almost 5 month order to delivery backlog! Details can be obtained from the LME notes and World Gold Council]

The way Chinese government is using T-Bills as collateral to fund massive infrastructure projects was a clear indicator of things to come. 

By September 2014, the Chinese dragon woke up from slumber and started breaking out of some critical resistances one after the other. The problem was the rise in Chinese markets was too much too soon and pretty much an asset bubble with a lot of margin trades [leverage] Chinese central banking agents were absolutely right in implementing tighter leashes because an index that languished at less than 50% off old peaks for over 2 years suddenly shot up defying gravity big time. Media pundits are again harping along big time about China being in a bear market since it has breached the 20% fall from peak.

I am not even getting into Elliott Waves here - simple technical analysis tells you that large swings up or down tend to retrace at least 50% in nominal terms and 38.2% in semi-log terms. So for an index that has moved from 2200 levels to 5200 levels, a 50% retracement is very much on the cards that pegs the retracement to go to at least 3700 levels before resuming the next leg upwards.

A lot of Indian tv anchors are making an absolute fool of themselves by saying money will move out of China into India. Taking the major index stocks into account, Indian stock market is worth a little over 1 Trillion USD. Chinese penny stocks alone are worth 8 trillion!!

Right now, all focus is on the major Grexit and potential repercussions. The structural bull market in China is absolutely intact. In the short to medium term, it may slip to 3250 as well but it is poised to scale 7500 levels over the next 5 years. The current correction is severe simply because the meteoric rise was fueled by leverage and when deleveraging has been imposed, weaker hands will be taken out in the process. All said and done, some headwinds have to be negotiated.

If the Grexit crisis and contagion does hit global markets, then we may see the Dollar Index briefly kiss the 100 mark. After things cool off in Greece and the next innings of QE begins to alleviate the pain caused, we will in all likelihood see the Dollar Index cool off to about 90 levels. This is the time when the Indian Tiger and Chinese dragon will roar once again.

[What goes up must come down; smart money is always on the look out for alpha and hence regression to the mean / law of averages will play out across asset classes]

Just as we have Hang Seng Bees, we may soon get Shanghai / Shenzhen Bees in India and should that come through, it makes sense to have SIPs in that!  

The Big Fat Grexit Drama / Nifty

Says Keynes, "Markets are irrational to the extent one is solvent"; whilst I may not agree with all his economic principles, I definitely agree with this prophetic statement of his.

We started with a huge gap-down and all major index futures across the globe were showing cuts of over 4%. First it was the put writers who ran for cover, then we saw some brave gladiators aggressively write calls only to run for cover towards the end.

Whenever this kind of uncertainty hits the market, there will be multiple knee-jerk reactions and at the end of the day, one starts wondering what the hell is going on! Technicals are supreme; temporarily they may show ticker prices contrary to technical expectations and that always happens in conditions of flux and panic. However, these tendencies are exceptions and eventually prices move back to regular technical conditions.

Going purely by a technical outlook for Nifty [I will be making a separate detailed post tomorrow with outlook for July 2015], we had a large swing down from 8493 to 7940 in April series.

8493 - 7940 = 553 points [61.8% = 342]
7940 + 342 = 8280 So a move upto at least 8280 was very much on the cards. What really happened was a fast and furious pull-back [signs of a structural bull market] all the way to 8425 odd levels.

With today's gap down opening and lows of 8200 [rounded], the swing has been 8425 - 8200 = 225
[61.8% = 8340 apprx]

Tomorrow is the monthly close. For the last 2 months or so, the critical price on a monthly time-frame has been around the 8380-8425 zone [Last month's critical number was 8410] If we do manage to close around the 8380-8425 zone tomorrow, then it suggests that regardless of where markets go in the early part of July 2015, prices will try to stage a comeback towards the end of the series exactly as they did in June 2015]

Back to Greece and why markets are so worried.....

ECB funding to Greece has been about 340 billion Euros over the last 60 months i.e. about 5.5 billion Euros a month [Note that this is the estimate for GREECE ALONE] If the series of bailouts have to continue, then the amount can be upwards of 500 billion Euros for the next 5 years!

Good economists also pride themselves highly on Game Theory and always say "Think Forward - Reason Backwards" It is difficult and time consuming for me to put out the illustrations here but as the so called Troika is examining the situation with Greece, the starting premise for ECB with Greece is "Heads = Greece Wins, Tails = Germany loses"

This game needs to be evaluated from ECB perspective
Node 1: ECB allows concessions to Greece. The immediate effect will be that the other PIIGS nations will haunt ECB even more with concessions offered to them. [Greece and Ireland are small drops in the messy ocean. Spain and Italy are the white elephants to manage. And if managing 1 drop like Greece costs almost a trillion euros including already spent money and further funding needs, imagine the costs for other PIIGS nations]

Node2: ECB allows Greece to get booted out of the Euro zone by coercion or by voluntary exit, it sends strong signals to other PIIGS nations that one cannot take the ECB for granted. However, this option then comes with far greater pain. There are trillions of dollars worth of derivatives betting exactly on a Euro-zone contagion. And these derivatives are largely spread across the bond markets and the moment Greece is booted out, there will be immediate repercussions in the derivatives markets of other Euro-zone members bringing in a temporary liquidity freeze not just in Greece [already in place today] but the entire Euro-zone

As this happens, it also sets a precedent for other PIIGS nations to work out on exit options. Regardless of which way the ECB decides on Greece, there is inevitable pain. From a Greece stand-alone perspective, the cost of Grexit has been estimated at about 1 billion dollars a month over the next 36 months as per Angela Merkel's calculations [refer bloomberg.com news and views from Saturday for details] Just as RBI does not care what Dalal Street wants, ECB does not care what equity markets want. Central banks have their objectives in a different realm all together

They are however aware that there will be a huge liquidity squeeze with Grexit because of the panic in bond markets and a HUGE RISK of Germany returning to DMs that will perhaps end up trading at 2:1 against USD if this event does take place. Any return to DMs for Germany will almost close doors for German goods and services all over the globe. Exports are the key to Germany's survival.

Last but not the least, there is the humanitarian aspect
Some of the images on Sunday were extremely disturbing
Queues outside of ATM machines resembled the queues Indians have at Shirdi Sai Baba Temple or Tirupathi Balaji temple! There was a 76 year old lady who was in the queue for 2 hours to withdraw her maximum quota of 60 Euros and when her turn at the ATM counter did come up, there was no cash left in the machine! The lady just fainted out of physical and mental stress!!

To get a feel of how bad the situation is, forget supermarkets but talk to mom and pop grocery stores [equivalent of our kirana stores] and pharmacies. With social security cover and/or medical insurance, a person cannot be denied access to medicines. Over the last 5 years, medical bill settlements have seen ballooning turnaround times [Remember that most of the medical insurance is underwritten by banks' insurance arms] From a regular 1 week turnaround time in 2009-2010, the turnaround time has gone up to an average of 90 days. Legally, medicines cannot be denied to people with genuine documents. With the bank run that has just begun, pharmacies are not sure whether they will even get back money rightfully due to them if the system itself goes bankrupt

As far as mom and pop stores are concerned, they have every right to refuse customers any form of credit, even to purchase essentials like milk, fruits, vegetables. That being said, these very stores may not get credit from stockists and super-stockists and with no resolution in place, the entire country's stockpiles of essentials will last for no more than a month.

Along with the Grexit, it will be a return to Drachmas for Greece that will be at least 10 times lower in comparison with Euro and release hyperinflationary trends. [In the post- World War time zones, Germans had to carry millions of DMs in wheel barrows to grocery stores to just pick up basic essentials. From a humanitarian aspect, Germany is very well aware of the pain, a common man has to go through]

One last example of the problem: A small business owner logged on to his internet banking account. As it happened with Cyprus in 2013, the system ended up displaying messages on the lines of "Book Balance xyz Euros; available for transaction = 60 Euros. It can be very frustrating indeed to not be able to access your own money. They money stuck in the bank can end up becoming literally worthless if Grexit happens.

So whilst the mainstream press is pointing fingers at Greece alone prolonging the negotiations, fact is that ECB also wants time to ring-fence itself and minimize the pain. It is definitely not a pleasant site to see people not being able to buy essentials with their own money for mismanagement from the baking sector [both Central Banks and Private Banks]. ECB is looking at every possible loophole in the derivatives legal codes to avoid having liquidity crisis for Credit Default Swaps.

To summarize, there is inevitable pain for Greece, ECB and in fact the entire Euro-zone. The only thing that one has to look at is how to minimize the pain. Also note that should a contagion take place, forget about US Fed raising interest rates or other major economies tightening monetary policy - it sets up the platform for next round of QE

So that is the background for the ongoing panic and volatility. Technicals may go out of the window for a brief 1 week timeline only to come back. As long as Rupee-Dollar exchange rates remain below 64.25 levels and bond yields do not jump past the 8% spot rate for 10 year treasures, India remains an active. Markets may not fall immediately but Rupee-Dollar above 64.25 and bond yield above 8% will the first indication of a large wave down.

Maggi In A Soup??? WTF

So Maggi has been in the news for excessive chemicals in food. Don't people know that. Pepsi and Coke have carbolic acid and aspetim [in diet versions] that are harmful???? [Note that I am a heavy consumer of Diet Pepsi n Coke Zero] Cigarettes are injurious to health - I find it stupid that US and Canada courts are awarding billions of dollars as fines to tobacco companies for "not warning adequately risks of tobacco consumption" People are well aware of what they are getting into [as mature adults. Nevertheless, I can speak only for myself and I am fully aware of risks when I pick up that puff or that peg. And most people are - it is a choice made]

Anyways coming back to Maggi - let us face it folks. It is an FMCG product that follows the conventional supply chain as of now. Factory to Regional Distribution Centre, Regional Distributor to Super Stockist, Super Stockist to Stockist and Stockist to Point of Sale. Business means every time a product or service changes hands, there is a margin to be paid. Conventional FMCG business works on the following premise [Average and Ballpark Figures]

Point of Sale - Margin = 10%
Stockist - Margin = 8%
Super Stockist - Margin = 6%

So for a product that costs 10 rupees, 2.4 have to be kept aside for margins for these players
Another 2 rupees have to be kept aside for trucking, warehousing and wastages
So from an MRP of 10 bucks almost half is already shaved off as expenses and these are all operating expenses. Then comes the aggressive marketing campaigns and salaries to be paid to staff. What is left is just about 3 bucks to produce [mostly contract manufacturing]

So is there any scope to have "healthy" ingredients??? "Healthy Food" means well controlled procurement of "good ingredients" that come at a price. That is why the meal at Taj or Sheraton costs that high. If you want a pack of noodles for 10-15 bucks, there is bound to be artificial chemicals in the product. [Because the company has to manufacture within the 3-5 rupees price band]

Note that I am not justifying Nestle or Maggi. The point I am trying to drive is that as far as the common man is concerned, s/he is well aware that if you pay peanuts, you get monkeys. This is universally applicable to staff, products and services.

When we go to the street corner to savor that bhelpuri, samosa, wada pav, chole kulche, we are well aware that quality will be a challenge. We attribute that to unorganized food sector and make our choice.

Just because Maggi belongs to a brand like Nestle, it is creating news. Even that is fine but then one needs to also evaluate Yippees, Chingles, Feasters [Private Label of Aditya Birla Group], Knorr et al. Take any of these brands and the odds of them failing quality tests are as high as Maggi. Right now, my personal contention is that since the issue has cropped up, why single out Nestle alone. Subject ITC, HUL, Aditya Birla, MTR, GITS all for food safety standards. Since this issue has cropped up, let there be a fair evaluation of the entire sample space.

We have had agitations with regards to pesticides in soft drinks, genetically modification in KFC. It will be in the news for sometime [till media keeps trumpeting it on prime time] and then fade away.

This is a daily chart of Nestle from 2013. Look at the volume bars.Whenever Nestle has traded on extra-ordinary volumes, yes prices collapse in the short term [3 to 6 months] and then resume their upward march. Currently, we have not yet reached the volumes that existed in 2013-2014

Normal Trading Volume on Nestle 80k to 100k shares

26th Nov '13 - Volume = 750k with spot price around 5000 bucks a share

28th Feb '14 - Volume = 850k with spot price around 4800 bucks a share

By 10th March 2015, Nestle stock was trading at 7500 clocking a 50% gain in 18 months.

Yesterday's fall volume was about 400k shares. So there is some more downside pending as the volumes need to hit 750k to 800k shares. Technically, the critical buying levels are 5800, 5400 and 5000 levels. Of course the rally of 2014 had a sentiment effect with the new government and the next rally will not be that fast. However, just like the soft drinks and pesticide news, KFC and chicken news, this MSG and Lead stuff will be behind us soon.

The stock will eventually reclaim old highs and perhaps attain newer highs of 10k levels. Since timing the market is next to impossible, this is a very good time to start an SIP on Nestle as the stock is poised to deliver 30% CAGR returns over the next 36 months.

Stock has breached 200 DMA with conviction and historically when Nestle breaks 200 DMA with volume and momentum, it tends to spend about 6 months below that 200 DMA mark.

Euro Zone Crisis and Why It Will Be Good For Break-Up

For the last 5 years now, the PIIGS crisis has dominated business news headlines and stock markets keep taking corrections every time there is mention of Greece. Let us first understand the basics of the common currency bloc

Euro-zone always had allied interests that allowed capital, people and goods to freely move within boundaries of Europe, more so after the Berlin wall collapse ending communist forces in the eastern bloc. With the exception of Germany, most countries were net importers of goods and services and a strong currency suited business interests. Also, the Asian Currency Crisis and 9/11 terrorist attacks much later, there were strong interests within Europe to create an alternative currency to the US Dollar. Germany being a high net exporter, also needed slightly weaker levels as compared to traditional marcs. So eminent politicians of Europe and banksters discussed next steps in this regard. Thus was born the concept of Euro - one continent one currency setup. Germany being the strongest member would have control of treasury for Euro. Certain rates were fixed for the Kroners, Guilders, Francs etc and all moved to common currency Euro.

Of course this had a short-term inflationary effect as salaries had to be revived by companies to match consumer spending in Euros. Things that were perhaps not adequately thought of during Euro creation

1] Diversity Mix in Countries: It is critical to note that Euro-zone has far more diversity in socio-economic conditions, similar to an emerging economy like China, India, Indonesia etc. The Nordic countries like Finland, Denmark, Sweden etc always were extremely strong economies due to low population and some strong industries. UK, France, Germany were also strong players in political as well as economic blocks. [The first alarm bell rang during creation itself - UK agreed to be part of Euro-zone geographically but not economically with the common currency] On the other hand, there were countries like Poland, Hungary, Czech Republic, Romania etc that had far more similarity with emerging nations than strong nations like Germany, Denmark etc.

It is no surprise therefore that even Indian technology companies like Infosys, Wipro, TCS set shop in emerging nations of Europe.

2] Disparate Policy Measures: The common currency setup implies control over Euro will be with ECB [read Germany] whilst fiscal measures are responsibilities of individual nations. Such a scenario never works. For details on this, please read the articles by Nadeem Walayat [marketoracle.co.uk] through the link given.

Look at India for instance - RBI and Finance meetings get log-jammed for this reason only. Everybody is pro-growth but anti-inflationary.  RBI has to do a tight ropewalk to take care of both. RBI chief rightly says within tools and powers in my arsenal, I can only control monetary policy. Fiscal prudence is government's responsibility and government after government is spending far more than earnings. [That is the reason why we have such a large and active bond market globally] The bonds are money raised from institutional investors to fund government expenses that cannot be covered with the tax collections. If we have this kind of a situation within India, imagine the state in a country like Spain, Greece, Italy etc

When the Euro started, it started to trade at parity with the USD. Over a period of time, it went from strength to strength. The going was good and everybody was in a mood to party. What nobody realized is challenges that will emerge over a period of time. Western society is very particular about welfare of human beings and there are a lot of provisions by governments in form of social security. So when the move to join a common currency came through, ideally there should have been as much harmony as possible towards fiscal measures as well.

Peripheral countries continued with their own schemes. Perpetual healthcare, high social security net for citizens etc. The music would stop at some point though. Over a period of time, countries started finding it difficult to meet even basic obligations to bond holders and that started sending jitters across the globe. [A large part of 2010-2012 equity correction was a result of this fear] Forget earning interests, recovering principal itself was a major issue. Institutional investors in bond markets are pre-dominantly banks themselves. That is when the bailout packages started coming in.

A Catch 22 situation started developing and is now reaching a crescendo; if ECB [i.e. German Tax Payers' money] keeps bailing out peripheral countries, it goes on a weak wicket back home. German citizens are angry. So when bailout packages are given to countries, they come with austerity measures. The moment there is austerity, public spending drops and creates political ripples internally in countries. Let me give 3 examples of countries based on my personal experience in those countries for considerable time for education as well as employment

Denmark: It had a strong corporate say with 3 major companies i.e. Maersk [large conglomerate with multiple interests though strongest in shipping related activities], Vestas [once upon a time king of wind energy] and Novozymes. The country has one of the strongest tax regimes but also some of the best social security measures. Due to exremely low population, it is able to manage all of that. Denmark is one of the countries where you literally don't pay anything for education. Rather, the government pays you to study and as long as you keep your grades respectable, you can study as much as you want in government recognized universities without bothering about fees. Hospital care is totally government responsibility - you only pay for the doctor's fees. If you are unemployed, you get allowance from the government [with certain conditions attached]

Maersk has been facing a tough time since the 2008 economic crash as shipping industry as a whole is still reeling under pressure. There is excess capacity of ships globally, ship-building once the pride of Denmark has shifted to Samsung, Hyundai in South Korea [Samsung is much more than mobile phones and consumer durables. Samsung has a very strong heavy engineering setup for ship-building, shipping containers manufacturing and Samsung accounts for almost 40% of South Korea's GDP!!!]

Vestas, once a crown jewel in the world of wind energy hardware manufacturing has lost out big to the Chinese. Since 2009-2010, the company has been tightening its belt to stay afloat. Novozyme is still active but being a bio-technology and pharmacy related company does not have too many employment opportunities. Maersk, Vestas and Novozyme put together probably employ over 50% of Denmark's population directly or indirectly [just like software in India. For every 100 jobs created by the It sector, it creates another 20-30 jobs in areas like transportation, food, telecom, facilities management etc] During good times, the housing market in Denmark was on a song with housing prices making new highs almost everyday. Now with bad economic times, housing prices have tumbled and the situation is so grave that the government has had to intervene and tell banks - increase tenure of loans to customers and forget the princpal - just focus on interest servicing!

Denmark or for that matter any of the Nordic countries like Norway [oil-rich], Sweden [home to Volvo, Scania and Ikea], Finland [home to Nokia-Microsoft] won't have much of a challenge. This is because of the countries' size, population and large businesses. In fact if the Euro zone breaks up and these countries go back to their old currencies 2 largest beneficiaries will be Vestas and Novozyme.

France: This country has been in a crisis since 1984 though they have never acknowledged it. It is one of the most populist and socialist governments that likes to control prices and keep high taxes. The population is ageing and state coffers are dry. They jumped on to the Euro with a strong currency in mind and let us not forget the country is a net importer of goods. The challenge is that austerity simply does not work in France. The work culture is different and if people are not happy, they can go on strike. In fact, France is plagued with strikes from bus operators to metro operators almost every month in some part of the country or the other. Tourism is a major attraction in France.

Spain: The people in Spain are very friendly in general and very relaxed as well in work culture. Lunch break can extend to 90 minutes as well. Spain is one of those peculiar countries where the paradox of socialist measures comes up to the surface. The average salary for simple jobs [factory workers, gas station attendants, security guards, tellers in supermarkets etc] is about EUR 1000 per month. Over 30% of the population under the age of 30 is unemployed. The government unemployment allowance is about EUR 800 per month [it varies from person to person but this is an average]. So a lot of youngsters are saying "Why should we slog out 160 hours a month for 1000 Euros salary when I can sit at home and make 800 Euros!!!" Classic Catch 22 situation for both Spanish and German governments. They want the Euro to be there as Germany is a net exporter and needs a market like Spain to stay afloat. For the Spanish government, laws for social security were made decades ago and taxes were collected in this premise. Now if the economy has to recover, you need youngsters to go out there and work. Unless the wheels of industry don't move, the government will be forever dependent on bail-outs.

Whatever is applicable for Spain, is applicable for Italy, Greece as well. It was once applicable to Portugal as well but they came back on their feet smartly. The premise that the Portuguese government used was a great sell to people; "Look I understand that your minimum wage has dropped more than 50% post-crisis. However, you also need to take into account that all other expenses you have to incur have also dropped significantly as the entire industry is reeling. Your net savings were negligible even in good times and even with a 50% reduction in salary, your lifestyle does not alter significantly" The masses took heart and started getting back to work - the end result is that a lot of firms found it productive to build manufacturing plants in Portugal. Transport within the Euro-zone is not much of a challenge. So taking into account carbon footprint, time to import from Asia etc, "total cost of purchase" for goods and services form Portugal are favorable to the industry.

Ireland also understood this concept well and hence the contagion has been arrested within reasonable means. Unfortunately as of now, Greece, Italy and Spain are having challenges with industrial rebound. Constitutional measures dictate that social security spend continue. Many youngsters not joining the workforce and smarter ones migrating to greener avenues like UK and US. The gap between what the countries earn and what they spend are significantly higher. Bailout packages call for austerity on these fronts but austerity comes with a lot of local backlash

What if the currency breaks up? Let us go back a couple of decades when we had the Asian Currency crisis that plagued Thailand, Indonesia, Malaysia etc. Initially there was panic, hyperinflation but what next? Thailand, Malaysia, Indonesia as tourist destinations that were once upon a time only for the wealthy people and business travellers came on the radar of common man. Exports from these countries started surging higher. They became highly competitive. Yes the initial 18-24 months after the crisis broke out was chaotic. That always happens with any economic crisis. But that does not mean the end of the world.

Greece, Italy, Spain etc all have strong olive production. They are excellent tourist locations. If the Euro currency breaks up and these countries go back to their original currencies, then tourism that is currently very expensive [due to Euro] will flourish. Today, just as it is common for an Asian to make at least one vacation to Thailand, Malaysia, Singapore etc, it will become very common to visit Spain, Greece and Italy in Asian currency denominations. Exports will flourish. As far as people are concerned, they just need to realize that rather than anchoring themselves with old salaries, numbers and denominations, they should focus on lifestyle. As long as they are able to get a certain kind of lifestyle [albeit a toned down version], it does not matter which currency they earn in and the amount.
But there is bound to be inertia as right from kindergarten, one has been conditioned with the notion that the state will take care of you.

There in lies the Catch 22 situation for Germany. They need the Euro [especially a weaker Euro] to stay competitive in industry. They have a captive market in Europe itself that will go away with the breakup of Euro-currency. The German Euro will move back to DMs and as against the prevailing Euro rates, the DMs will become twice their worth in exchange making them extremely noncompetitive. So they have a double whammy effect; lost customers as well as lost businesses. There is a vested interest on part of Germany to keep the Euro-zone intact for as long as possible. However, they face a backlash back home with tax payers who are slogging it out whilst peripheral countries are just enjoying life

So if any trade pundit says that there will be a catastrophe, it is fairly logical. When such fundamental changes occur, there is bound to be short-term negatives. That being said, it is not the end of the world. If anything, it is going to make things better from the current state of affairs. From an Indian perspective, today, a Europe tour package costs about 1 lakh INR per head for about 8 to 10 days. If the Euro-zone break up happens, that will bring down the bill by about 50%. Just as travel portals are wooing you for a budget trip to the Far East, suddenly you will be bombarded with advertisements to travel to peripheral Europe. 4 Day Spain visit for INR 27k, Greek island visit for 25k etc etc etc

And how do you make fund provisions for that? When [there is no question of IF - the Euro-currency collapse is inevitable] the contagion hits, there will be sharp falls in equities all over. Rather than succumb to fear seeing bloodbath on streets, at least in India we should look at building an equity portfolio. As I mentioned in my earlier post, the technical bottom for Nifty is about 7200-7400. In cases of extra-ordinary events like credit crisis, there may be short term pain perhaps even testing 5900-6200 levels. All that is nothing but great opportunities to increase portfolio holdings. Even if we go down to 5900 levels, the eventual target for Nifty is 10k [that will perhaps come in a couple of years] The fall to 5200 in Aug '13 was the sweetest spot to go long on equities. Likewise whenever the next catastrophe roils the markets, the entire 5900-7400 zone are sweet spots to buy. The purchases made in this period will translate to about 30% CAGR in a 36 month period.

To summarize - Euro-zone crisis is bound to roil markets globally. Either tax payers in Germany or people in peripheral countries will ensure that it happens [each for different reasons though] Despite all the austerity discussions, ECB will try its best to keep the Euro-zone intact for as long as possible for their own interests. When that happens, it is short-term pain but long term gain for everybody having stakes.

Waiting for that collapse to take place personally ;)

EOD CONTEST JUNE 2015

Hello Tweeple and Blog Viewers

From this month, we have a special contest on this blog i.e. EOD Prediction
[By taking your mouse pointer to the text below, you will get the link]

EOD CONTEST SHEET

WHAT?
Predict the Nifty Closing for a trading day
You just need to update your Twitter Handle and/or Email Address and post your prediction on the sheet [Link Above]

Rules
Only one email address / Twitter handle per user to be used
Entries for a trading day should be done latest by 2pm IST

Scoring Guide
[Given in the link above]

Prizes
There are special prices for the top 3 scorers at the end of June series.
Winners will be contacted individually

Outlook For June 2015

So the adage 'Sell In May & Go Away' did not hold fort as far as Nifty goes. The selling happened and there was a pullback with a critical close above 8410 to end May 2015. Yesterday European markets ended sharply lower with DAX taking the strongest beating but our markets went through their own trajectory. Let us have a quick review of charts

Nifty Daily

 Nifty Weekly

 BankNifty Daily

 BankNifty Wekly

Nifty chart is extremely clear with the corrective phase. The 50 DMA line has crossed below 100 DMA confirming a corrective phase. As of now, the upside seems capped around 8625 levels and a test of 7800 is on the cards. Over the last 2 months, on 3 instances, Nifty has hit the 50 DMA and moved lower. Once on 17th April [when downtrend was strongly pronounced], second time on 22nd May around 8477 and on 29th May. Now if it does manage to pierce it with a follow up in first week of June, there is every likelihood of testing the upper end of the channel at 8625 levels. As long as 8625 is not breached on closing basis on daily and weekly basis on upside, the rallies are merely corrective bounces. Have a look at this chart

This is the corrective phase that started in Nov '10 and ended in Dec '12. There is uncanny resemblance in the pattern exhibited on Nifty currently. [However, a similar pattern was shown earlier around Diwali 2014 and it got invalidated subsequently] In the current scenario, the pattern will get invalidated with 2 consecutive closes above 8625 on daily basis or a weekly close above 8625

What is divergent at the moment is the BankNifty Chart

In the Nov '10 - Dec '12 corrective phase, Nifty and BankNifty were pretty much following the same path. The present price Nifty chart is having the same pattern as that of Nifty Nov '10 chart but not the BankNifty chart. BankNifty also had a corrective channel and that has broken on the upside last week. Of course the Nifty index components have changed significantly compared to 2010 and changes in stocks like Asian Paints, ITC, Sun Pharma have a lot of bearing on the index. Even with these exceptions, the current divergence on BankNifty is too high to be ignored.

If this is just a rally on expectations of a rate cut on 2nd June, it will fizzle out. We have to wait and see how BankNifty behaves around the 18800 levels spot and how it pans out. 2 consecutive closes above 18800 on BankNifty implies a large retrace of the fall from 20500 levels to 17200 levels with a minimum target of 19200. On the downside, the 17800-18200 levels should be able to provide support. Failure to hold 17800 levels on a weekly basis will give a steeper cut towards 16800. So the jury is split wide open on BankNifty and the range is too large 16800 - 19200 [Definitely not useful for trading].

From a trading perspective, we have to go with shorter time frames. The first sign of danger for bears will be breach of 18800 on upside on closing basis. The first sign of danger for bulls will be collapse of 18250. By 5th June, there should be some clarity on this front. Keep a watch on the Twitter feed for daily levels.

There are a lot of expectations on the basis of projects announced by the government and people are wondering why equities are not reacting to these news. As the saying goes, markets discount the future well in advance. Positives from these projects at infrastructure level and public spending were already discounted last year.

On the positive side, German elections, UK elections have all played out. There is only negative, impending and that is future of PIIGS in Euro-zone. Greece will be the first one on news and that was the reason for sharp collapse on DAX and CAC yesterday. We need to remember that a lot of that has been factored in and over the last 2 years, ECB has ring-fenced itself well with LTRO and liquidity measures. However, in the unlikely event of Greece getting out of the Euro-block [either being booted out or Greece exiting on voluntary terms], there will be a bout of panic that will spread globally. What will shake institutional investors is not Greece per say. It is the risk of contagion spreading across Europe that will trigger panic. In the short-term, if such a thing happens, there will be a capital flight to safety to the US Dollar and German Bunds. [I will cover the Euro-zone issue in a separate post later today]

Such panic will affect all markets globally but technicals will eventually rule back. So as far as Nifty is concerned, with such a long sustained tenure above levels attained in May 2014, 7200-7400 is the technical bottom. Short term irrationality may taken levels lower but the rebound will be equally sharp and swift [Remember that the technical bottom prior to Lehman Brothers crisis was 3900 but the collapse continued through to sub-3k levels only to recover] Another difference between the Lehman Brothers collapse and current crisis is that Lehman Brothers was an unknown event. Things were hunky dory and it came as a jolt to people across the globe. This time around, at least with the Euro-zone crisis, the surprise factor is not in the picture. The issue has been in the news since 2010 and given institutional investors adequate time to prepare themselves.

However, there could be some black swan events that can happen, triggering a strong correction in markets. As the adage goes, correlation can be established but not causality. During the run-up to elections to 2014, I mentioned how fashion trends, media trends are all pointing towards a strong bull market for 2014 [Yes, I do believe in Pretcher's concept of Elliott Waves as well as Social Mood; that he has got things wrong since 2010 are a result of his biased thinking and self-fulfilling prophecy syndrome]

So what are the social indicators pointing out that a major correction will come through over the next 18-24 months

Box Office Collections: With the multiplex introduction, we have had so many genres of movies hit the box office over the last few years. In 2013-2014, even movies like Fukrey, Vicky Donor had high footfalls and showed that social mood was turning positive. Over the last 6 months, even big names and big stars have failed to set cash registers ringing. On the fashion front, advertisements were extremely bold, embarrassing parents when they showed up on screens during prime time. Now advertisements are getting even more irrational; "Ghar mein lagao HD color???", "Platinum 3G has arrived to Mumbai???" Last but not the least, BFSI companies advertising "This is the sweet spot for equities in the long run" We are approaching a top for sure.

Technology has been a great enabler for making life productive. Smartphones, internet and cloud computing are all examples of how automation and technology makes us more productive. However, when valuations reach maniac proportions, it is sign of trouble. Billions of dollars for whattsapp, bookmyshow, olacabs, zomato are signs of trouble. Google has its base in advertising and the same is the case with Facebook as well. Whattsapp despite being a free platform for users, has an extremely high value for larger hi-tech companies due to the fact that it records the mobile numbers of people and will help business analytics tremendously but 19 billion??? Give me a break. We are looking at the same mania in the internet space at the moment. It is due for consolidation and there will be some clear winners. However, there will be far more flops than hits and the entire funding that technology startups are getting are in the hopes of a good IPO. All the discounts that are being showered now can be recouped with a good IPO. As soon as the credit squeeze hits markets due to geo-political and socio-economic factors, technology funding will take a hit.

Fibonacci Timing
2-3-5-8-13-21-34 are critical Fibonacci numbers. 2016 marks an 8 year period from the Lehman Brothers crisis. 2015 marks a 5 year period from the time Euro-zone crisis that first surfaced. [And 2008 marked the 8 year period from the 2000 economic debacle busting startup technology] The social mood and Fibonacci points towards a correction globally. That being said, it is difficult to know exact timing of events. Blind shorting can create challenges as markets are irrational. Suffice to say that beware - sudden negative surprises can spring up at a time most unexpected

Statistical Significance
I mentioned this in my earlier post this year as well; historically, the 3rd year of the 2nd term of a US president marks a strong correction in markets. Let us look at extremely strong global market corrections over the last few years [Taking into account 2 consecutive terms of the US President]

Roosevelt started his presidential term in 1933 [when recovery from 1929 was underway] and extended and ended with World War 2

October 1987 - 2nd term of Ronald Reagon [President from Jan '81 to Jan '89]

October 2000 - 2nd term of Bill Clinton [President from Jan '93 to Jan '01]

October 2008 - 2nd term of George Washington Jr [President from Jan '01 to Jan '09]

Currently Obama is serving his 2nd term and is in his 3rd year!

I am only taking into account 2 consecutive terms of a US President over the last few years and global economic scenario. Truman was the only exception when there was no major economic collapse globally. All countries were trying to bounce back from the debacle of World War 2.

What is important is that there is 'statistical correlation' with 2nd consecutive terms of US presidents, especially in their 3rd years of the 2nd term. We are not blaming the presidents here for economic debacles - please that should not be the inference. As Naseb Taleb says in fooled by randomness, "Don't look for patterns in what could just be a cinnamon roll"

From my personal outlook, social mood, Fibonacci and statistical outlook when all these converge towards one outlook - it is too strong to be ignored. Last but not the least, the surge in global equities has in no way created better job situations on ground. So if one keeps on shorting the market looking at these factors on a stand-alone basis, the odds of losing money are higher.

Even globally, there is a remarkable shift in the underlying principles of capital markets be it bonds, stock indices or currencies. DJIA = Dow Jones Industrial Average
What are the major components of DJIA today? Apple, American Express, Visa, Microsoft, IBM, Verizon, United Technologies. From the conventional manufacturing and industrial space, we just have names like Boeing, GE, Merck, Coca Cola, Mc Donalds, Chevron and Du Pont. Boeing is highly cyclical and is on the verge of topping out, GE is increasingly shifting to cloud computing and services as manufacturing is taking a hit. Nevertheless, if Apple, Microsoft, IBM could propel Dow to new highs, these very stocks can pull them down as well.

As interest rates reduce, currencies were expected to behave in a certain manner and hyper-inflationary pressures should have triggered economies. 5 years of rampant money printing has had little impact on the US dollar [it has only strengthened], commodity markets have collapsed, and people are flocking to US Treasuries and German Bunds. This is simply because the rules of the game have changed. US dollar and German Bund are perceived as safe havens for separate reasons and hence classical theories no longer work. In older days, the job market and economic activity were positively correlated with equity indices. That is no longer the case.

Precious Metals and Crude
I keep repeating this every month. Gold and Silver have had a 13 year mega-bull run from 2001-2013. So a 3 year correction is fairly logical in terms of time. In terms of price, I think prices have found bottoms in dollar terms. For gold, any severe correction due to deleveraging of institutional speculative positions will still arrest prices within the 1000 dollars per ounce band. All said and done, at sub-1200 levels, most gold mines are making losses. And sub-1200 per ounce prices trigger a great demand for physical deliveries of gold by a lot of eastern nations. Since we are at the fag end of the correction in gold, over a longer term horizon, one can still expect a 10% appreciation per annum over the next 5 years. Silver as an industrial metal is losing sheen but is finding uses elsewhere. It is poised to grow higher again by about 10% per year.

Crude oil, for all the negative commentary in the media, prices have already regained some gains and from a technical perspective, the fall from 105 levels on Nymex to 45 levels will create opportunities for a 50% retracement towards 70 dollars a barrel by the end of this year

To wrap up, Nifty trend will get clearer by 5th June. The period from 15th June to 30th June will be highly volatile with 21st June Summer Solstice being a critical turning point. As of now, the range for the Nifty is at 7800 on the lower end to 8625 on the upper end. Should there be a change in this outlook, I will update it on the Twitter feed.

From this month, there will be a special contest for all viewers of this blog. Predict the Nifty closing level for each day on Twitter with #NiftyParadoxContest on twitter and also update your entries on this document EOD JUNE CONTEST. The top 3 winners will get gift vouchers. [To participate, you just need to share your Twitter handle and/or email address. The entry must be done by 2pm of that trading day]

Enjoy a happening and exciting June series.

Outlook For May 2015

So it has been a very eventful April with large swings on both upside and downside [with a greater bias on downside]. We are now heading into May and as the market mantra goes 'Sell in May and Go Away'. One of the key take-ways was the extremely low values of Nifty spot on Monthly / Weekly and Daily time frames.

On the daily time-frame, 2 closes above 8380 are needed for further impetus.
On the weekly time-frame, a close above 8580 is needed on one of the Fridays in May 2015
On the monthly time-frame, a close above 8325 is needed to keep bullish bias in place.

Supports and Resistances
As usual, old resistances will turn into supports and new resistances will be formed as Nifty moves into uncharted territory.

For the remainder of 2015, the following will be crucial supports / resistances

Supports: 7200 - 7440 - 7580 - 7680 -7725 - 7800 -7880 - 8025 - 8080 - 8180 - 8225 - 8280

Resistances: 8325 - 8380 -8480 - 8580 - 8625 -8680 - 8725 -8780 - 8825 - 8925 - 9025

The way BankNifty behaved in expiry week, it seems poised to once again to test the 18800-19200 zone. This wide band of 400 points is very crucial and failure to surpass this will invite steeper cuts on BankNifty towards 17250 over a 6 week period [apprx]. Of course the fall will not be one way just like the rise with corrective phases in between.

My personal outlook is that the bull party is over for 2015 and we have entered a major corrective phase where the larger trend is down with corrective rallies in between. [Only a close above old Nifty high will alter this view]. Corrections are good and healthy for the market. Corrections do not mean one way falls always.

The most recent correction on a larger scale was the period from Nov '10 to Dec '11 - about 13 months. Nifty peaked at 6338 in Nov ' 10, and the corrective pattern played out as follows

6338 - 5690 - 6181 - 5177 - 5944 - 5196 - 5740 - 4728 - 5400 - 4531

As we can see the falls are sharp and equally sharp are the rallies as well in between.

In the current phase, I think a short-term bottom has been formed or may form one around 8025 levels. The fall has been from 8800 odd levels so a retracement to 8580 is very much on the cards.

Now there is a lot of talk going on about stocks moving around 200 DMA. Let us analyze some of the charts quickly to understand price behavior in corrective phases

So both on upside and downside, 200 DMA is usually tested thrice for support/resistance before a clear trend emerges. Just because some stocks are trading below 200 DMA now does not necessarily mean a clear downtrend. That being said, it does not confirm uptrend either.

I have been saying for the last 6 months that it is time to book out of equities and reduce net long exposure. For new investors and slightly risk averse investors, it is better to stick to the SIP mode. Decide on a corpus of say 1k to 2k for counters like LT, SBIN, Tata Steel, NiftyBees, BankBees, JuniorBees etc. With a constant amount, keep accumulating the number of units and over a 3 year horizon, they are bound to yield 20% CAGR.

For the larger picture, let us not forget that 7200-7400 is a pivotal bottom. Unless a major Lehman Brothers like crisis takes place, the correction will not perhaps extend below this. In case of Black Swan events also, the falls will be accompanied by swift rallies. These are of course larger trends for investors and it is not going to help traders in any way.

From a trading perspective for May 2015, first let us look at the Nifty / BankNifty charts

On a daily level, one needs to be very nimble footed. Right now, I am working on the premise that an interim bottom is already in place. For safe traders, it will only be confirmed with the level mentioned above. For a slightly risk-on trader with adequate margins, 8025 and 7800  [if it comes] are good contrarian entry points. On upside, 8580-8625 is where the short-covering rally should likely terminate [8825 in case of excessive bullish undertone with UK election verdict]

On BankNifty, 18800-19200 is where the short-covering bounce should end [19800 in excessive bullish mood]. These levels keep changing on a daily basis and will be updated on the twitter feeds.
The fall has been sharp and a short-covering bounce is very much on the cards within then next 5 trading sessions. Ride that wave but bear in mind the critical resistances as LARGER TREND will assert itself on Thursdays / Fridays and towards the the end of May.

Assuming the larger trends go as per these lines, the downward phase will likely last till 21st June.
Enjoy the upside and be alert and prepared for the larger trend where a lot of bucks are waiting to be made. The UK elections and MAT issue will be reasons attributed to the short-covering rally. For the downleg, any reason like unrest in Europe, rupee weakening, oil prices hardening - any excuse can be used.

April, May and June are exciting months for trading both upside and downside; April certainly gave that though I admit that the downside was more than anticipated. Now enjoy May and June as well.