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

Some Longer Term Buying Opportunities - Bargain Buys

The strengthening of the dollar has been playing truant as far as commodities are concerned. Hence, on Indian bourses also, we are seeing some blue chip names getting battered and for all one knows, these are perhaps buying opportunities with a 2-3 year time horizon

First things first, let us evaluate Dollar Index
The Dollar Index has surged from 75 odd levels in 2011 to 99 levels and even in case of extreme panic, it may spike to 101 levels. Almost 5 years now and a correction in Dollar index is on the cards. What news and events will take it there, I do not know. However, technical correction of 50% retracement will gradually take it back towards the 85 levels. Of course that will not happen immediately but over a period of 2 years

Even at constant commodity prices at current low levels, this dollar weakening will automatically propel commodity linked prices by 25% to 30%. As we are aware, commodity prices will also not stay stagnant. They will rise along with the weakening dollar giving an upside potential of 50% to 60% of blue-chip commodity price linked stocks

Tata Steel
Last time, Tata Steel had its fall arrested in the 200 zone. This time, even 200 may not hold and there is every chance that the stock may test 150 levels. That is fine. It is a Nifty bell-weather stock and will continue to be so. It will eventually surge to 350-400 levels

Hindalco
Let us ignore the Novelis loss for now. Fact of the matter is that Hindalco is the global leader as far as cans for food and beverages segment is concerned. It has been doing extremely good backward integration to reduce power costs [the biggest cost as far as aluminium manufacturing is concerned]
Short-term, the stock may go to 75 levels also and that is fine. With recovery in aluminium prices, and weakening of dollar, the stock will find its way back to 150+ levels

Cairn
The stock has its price linked to crude oil prices. In between, there was a risk of losing out cash with merger with Vedanta. Now that majority share-holders have rejected that move, it is still a crude oil price play. To the extent Cairn steers clear of merger with Vedanta, the max downside that this counter can have is in the 100-120 zone. However, when crude prices will eventually surge towards 65 dollars per barrel, this counter will come to 275+ levels IMHO

The regular index will follow its own course. However, there are instances when there are good opportunities to pick at bargain prices and hold in the portfolio. These counters IMHO are right now presenting opportunities to be picked. They may not end up multi-baggers like the FMCG, IT or Pharma but still have potential to generate 30% CAGR returns over the next 3 years

Disclosure: I have personal holdings directly / indirectly through family members in these counters. I have also recommended these counters to people in my professional network

Outlook For August 2015

So it has been yet another roller coaster month starting with gains, then a sudden fall and a mind boggling recovery. If we analyze the last 3 months, this has been a pattern with Nifty

It starts the series with a rock solid opening only to fizzle out sooner. A lot of people are already resigned to the fact that August may again repeat the same story. Unless a Black Swan event comes through, I personally believe that this time the story will tilt towards the bulls.

Over the last couple of months and July as well, the 8380-8425 zone was critical on the monthly time-frame. In May, the series ended at 8433 [border] and in June the series ended at 8368 giving a fair clue that prices would gravitate towards 8400 as we move closer to expiry.

31st July is the first day of the August series and it seems deja vu as far as first day of stellar performance is concerned. What is critical is that it is the close of the month as far as technicals are concerned [Technicals don't care when expiry is done!] The crucial zone for month close was 8380-8425. We have closed well above that for the calendar month of July. This makes August series a high probable month for bulls. Will there be no correction at all?? Corrections are healthy for the market and will take place - the quantum is what matters. So from a mathematical, statistical and technical point of view, the max downside is 8180 for August series barring Black Swan Events.

Even if the Nifty drops to 8180 levels, it is poised to recover smartly just as the case was with the recovery from 7940 levels. On the upside, 8800-8825 zone has been a high resistance zone on Nifty. As of now, the expected range for Nifty in August series is 8200-8800. We are right at the middle zone right now. I cannot say which end of the range will get a visit first. If we do get to the upper end of the range first, I will be cautious with shorting. On the downside, I would be a buyer in the 8180-8280 zone with SL at EOD < 8080

For the BankNifty, the expected range is 17800-19200 levels. 18800 level also has been critical for the last 2.5 months with just 1 week when BankNifty was above this zone. When I look at the major banking names, even with a stellar performance on Friday, SBIN is at critical resistance of 275-282 band. ICICI Bank has stiff resistance at 325 levels for now. LT has made a double top in the 1825 zone. Which end of the market will be visited first - will get clearer by Wednesday, 5th Aug '15.

NIFTY / BANKNIFTY CHARTS

A glance at the weekly chart clearly shows that unless there is some major economic catastrophe, the severest correction will not take Nifty below 7442-7525 levels.

BankNifty weekly chart clearly shows why most of the action will be in the 18500 +/-300 points zone for most of August series [21, 34 and 50 week Moving Averages are trying to converge at 18500 levels] First, they will converge [4 to 6 week process] and then determine whether an upper cross-over has to happen or the other way around. As far as my understanding of MAs in higher timeframes is concerned and the concept of 'Regression To The Mean', even if on an hourly or daily time frame, prices go above / below 18200 and 18800, prices will gravitate or levitate towards 18500 till convergence of 21, 34 and 50 week MAs]

The range is pretty good on Nifty as well as BankNifty from a trading perspective in August. Falls will be buying opportunities. As far as shorting goes, it is better to wait for confirmation on at least daily time frame. 

For the EOD June contest, our winner is Asit. My apologies for not having got back to you in time.

Will connect with you personally next week.

Stocks for buying on delivery basis [Longer Term Recommendations]

I would still go with the metals pack Tata Steel and Hindalco. Tata Steel may correct downwards upto 150 levels also but will find its way back to 300, followed by 450 in a 3 year timeframe.

Hindalco may correct downwards to 70-75 levels also but it will most likely reclaim 160 in a 3 year timeframe. 

Tata Global Beverages: The stock has been in a range of 120-150 for over 3 years now. It is likely to do that for some more time. However, I personally believe that this stock is a potential multibagger with a 5-7 year horizon in mind. This stock has potential to repeat the past outperformance of Tata Coffee and Trent Retail.

In the financials, L&T Finance and IDFC would perhaps be the next outperformers with a 5 year horizon in mind. L&T is gearing up to be a supermarket of funds and insurance and will perhaps bag a banking license soon. IDFC has been good with fund management on both equities and debt. With more innovative products like Trade Finance and Supply Chain finance, this stock has the potential to be the next Yes Bank / Kotak Mahindra Bank in terms of relative stock outperformance.

We must note that such scrips stay in embryonic / gestation phase for longer periods of time and then shoot up like bamboo sticks. One needs to be extremely patient. There was a time when Axis Bank and ICICI Bank were traded at 28 rupees a share [2.8 rupees considering the stock splits] They simply kept oscillating around this range for almost 5-6 years before soaring to stratospheric levels

Even the 52 Week Low of ICICI Bank is 100 times the original price [considering split]

To summarize, I don't think there is too much potential for Hindalco and Tata Steel to outperform as such. The true range is known. These counters should be accumulated when the prices are below the true ranges. Being linked with prices of metals on international markets and debt-intensive nature of the businesses, they can't go on to make fresh highs. Forget fresh highs, they perhaps may not even visit the old highs!

Tata Global Beverages is a futuristic story on aspirational Indians. L&T Finance and IDFC are in the budding stages to become the next Sriram Transport Finance, Yes Bank, Kotak Mahindra Bank, Bajaj Finserve etc.

Disclosure: I do have personal holdings in the mentioned counters directly or through family members. I have also shared / recommended these counters with contacts in my professional network. 

Outlook For July 2015

Well it has been a very exciting June series on expected lines with large swings in either direction.
The Grexit woes are currently looming large. I won't get too much into the details as I have already covered the same in 2 separate posts.

What do we expect for July 2015???
Common market mantra for Nifty is Sell in May & Go Away / In July Make the Nifty Fly
Sell in May was not a predominant theme this time and it is too early to hazard a guess for July

Review of Nifty / BankNifty Charts

As far as Nifty is concerned, there are 2 major resistances to be conquered

1] 8425 [apprx] The prev swing highs prior to June expiry

2] 8493 A major swing high from where the previous fast and furious fall started towards 7940

2 consecutive closes above 8493 [8525 for a bit of tolerance] and Nifty opens for a retest of 8800 levels [vindicating in July make the Nifty fly]

At the time of writing, Nifty is flirting with the 8425 mark but I can stick my neck out and confirm that both 8425 and 8493 are extremely difficult to negotiate and would need a lot of volume and momentum [especially 8493 as that has stuck out for almost 5 weeks now]

On the downside, 8225, 8125 and 8025 remains good supports from where bounce backs can be expected.

On BankNifty, the critical resistance comes at 18600. As of now there is a short term double top formation around the 18800 area. 2 consecutive closes above 18600 and breach of 18800 with volume and momentum opens Nifty for test of 19200-19400 area.

As I have kept saying again and again, it is not the Greece standalone issue that is sending shivers for hot money. It is the risk of contagion and negative precedence it sets for a negative chain reaction across bond markets that will result in a lot of liquidity contraction with investors' flight to safety.

As I mentioned in an article earlier, purely from a sovereign debt perspective, ECB's standalone cost of Grexit standalone is estimated at about 40 billion euros over the next 36 months. The real uncertainties come on the shock-waves after that.

First and foremost: A large scale currency devaluation should Greece go back to Drachmas and what happens to the depositors' money in the banks. What exchange rates will be used?

And then if these things spill over to other PIIGS countries, the impact is much larger in countries like Spain and Italy.

The humanitarian angle: With deposits curbed at 60 Euros per card and ATM machines without cash, basic food, medicines and fuel purchases are also in danger. Procedural justice for sovereign mismanagement is resulting in a humanitarian collateral damage.

Multiplier Effect: There is not much public domain data in Europe with regards to Credit Default Swaps. Even when the previous 2008-2009 crisis took place, it was the Credit Default Swaps market that accelerated the credit crunch.

Hopefully by 6th or 7th July, we will have clarity on the issue.

So let us stick to critical levels and other indicators to watch out 

For the Indian equities arena, I have already outlined the crucial resistance and support levels.

2 things that I will be watching very closely are USD-INR and 10-Year bond yields. As long as spot rates are below 64.25 for currency and below 8% for the G-Sec, the house is in order. If the currency starts trading above 64.25 and / or bond yields harden over 8%, the corrective phase will get prolonged. For the corrective side, the pattern target comes to around 7650-7700 zone

Which way it will go, time will tell.

However, for the longer term, there are a lot of individual stocks that are ripe for accumulation.

Hindalco, Tata Steel, IDFC, Nestle, Tata Global Beverages are all at attractive levels. They may fall further from current levels by another 20% to 30% but that is ok. The time horizon for these investments is around 3-4 years and expected gains are at 20% PA in the longer term.

In the second week of July, Jupiter, a major planet will move into the fiery sign of Leo. On a personal level, it will bring a lot of positive changes for some whilst challenges for some other. Across capital markets, this Jupiter transit will bring a medium term shift. Whether it is a change for positive or negative, time will tell. But some certainty and direction will come into force by the end of July 

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.