Consumption Cliff??!!

I have expressed my opinion on the Indian consumption story through the following.

FICTION

SHORT CONSUMPTION

Its been a year since then and I thought it was worth revisiting the topic.

Will first take the "SHORT CONSUMPTION" view.
Very clearly this has not worked out as expected and in fact in some cases there has been a decent positive return to those who held on the stocks.
There are a few stocks which have gone down,but broadly there is no denying that the shorting call hasn't worked.

Here is a snapshot of why it has not worked out.

And now I will come to the "FICTION" bit...

As I have already suggested there, that the growth in consumption is majorly funded by the huge deficits and would not have been this strong but for the deficits.So given the performance by the consumption, do I still think the same way??

In the last 6 months, the consumer durables and auto numbers suggest there is a slowdown.In some cases,its negative growth.

The positive news has mostly come from the FMCG companies in terms of volume growth, but that was expected and I also didnt expect them to do badly,as I have mentioned in the articles.
So on this front, it is going as suggested in the article.
But it is still not clear whether the slow growth currently visible in various consumer categories will become a full blown recession in this sector.
At this point ,I just would like to draw attention to some data points.

- According to RBI, the projection sanctioning has less than halved from FY10 to FY12. SBI CMD has given even more drastic numbers for the first half of FY13.The projects being executed today were awarded and sanctioned 2-3 years back.
Given that project sanctioning has slowed down dramatically in the last two years and is continuing as we speak, it looks very likely that project execution will struggle big time in FY14 and FY15. That may lead to employment and job generation problems.Persistent inflation with job insecurity will not help consumption.

- The other point is that, though the government deficits are still out of control, the incremental deficits are towards oil and fertilizer subsidy bills. Most of this money goes straight out of the country to where we imported the stuff from.So doesn't add to the pockets of the consumers,who are already struggling with higher prices.

Recently Kotak came out with a report fearing a "Investment Cliff". Putting my head on the block and I suggest that "Consumption Cliff" is also on the cards.

So inspite of the underperformance of my previous recommendation of shorting or selling consumption stocks, I re-iterate the call.

Get ready for a "Consumption Cliff"!!

(Standard Disclaimer: The probability of my opinions going horribly wrong is closer to 1 than zero!!)

60-65 on the cards...??

INR may not stop @54...

Since I wrote this a few things have changed....

- Gold imports into India have collapsed by 40-50% in volume terms.....
- FIIs have poured in large quantum of dollars into Indian equities.....

But 

- Crude oil prices are still hovering around 110-115$....
- Exports have suffered...so trade deficit has not declined materially...

So whats the result all put together...??..

We have USD-INR trading at around 55.72 right now....

Continuing my play with the double edged sword...I suggest that USD-INR in the 60-65 range might be reality sooner than later.....I am no expert but this could happen within the next one year....


(Standard Disclaimer : The probability of my opinions going horribly wrong is closer to 1 than to zero!!) 

India - The Balance Sheet Crisis

The last article was all about trying to be short and sweet, but unfortunately cant say the same about what I have written below.

As the title suggests this is more about balance sheet. And its about balance sheets of various kinds.I know most people relate balance sheets to accounts, but here its more to do with the generic sense of the term "balance sheet".
Hopefully by the end of it, what I mean would be clear.

So lets start with the first one.

Energy Balance Sheet - 

India has a lot of coal (though it is questioned by a few), lesser natural gas and even lesser crude oil reserves.That we import 80% of our crude oil requirements is thus not a surprise. We import, maybe, half of our natural gas requirements. 
But very soon we will be importing big quantities of coal as well.This is a combined result of corruption, bureaucratic lethargy and some environment conservation efforts.
Thus the energy balance sheet has too many annual perennial liabilities and little to speak of in terms of assets. Dependence on external elements for critical energy requirements puts us in a very uncomfortable position to say the least.

Water Balance Sheet - 

India has been blessed with rivers of the size of Ganga, Yamuna, Godavari, Cauvery etc. But blatant abuse of river waters has made quite a bit of the water unusable for even mundane activities like washing clothes, leave alone drinking it.Unabated illegal sand mining on river banks or dumping of untreated chemical waste in the river has left such a precious natural resource in a precarious state.
Faulty policies have led to over utilization of water pumps and fast depletion of underground aquifers. The situation is particularly severe in North India which happens to be the granary of the country.
That water availability is crucial for everything from agriculture to industries to households is obvious.Volatile monsoons can cause problems for a few months, but a structural deficit or supply problem in this domain is an absolute killer. Its a balance sheet with diminishing assets.

External Balance Sheet - 

When the financial crisis struck in September 2008, India had foreign exchange reserves of more than 300 bn USD and external debt of around 220 bn USD. Populist govt policies and consumption driven growth momentum has turned the situation upside down, with external debt hovering around 350 bn USD and foreign exchange reserves in the range of 290 bn USD.

The Water and Energy problems discussed above along with the land acquisition problems have made manufacturing expansion difficult and are likely to add to the External Balance Sheet problem through the Current Account Deficits.
Crude oil price and gold imports matter, but what can be done on the domestic front to reduce their impact is not being done, as of now.

Corporate Balance Sheet - 

While corporates in the US and Europe are deleveraging are sitting on record amounts of cash, Indian corporate balance sheet is not in that great a shape.
Most major industrial groups in the country have hugely leveraged balance sheets. In fact a recent report Credit Suisse estimated that the top 10 corporate borrowers account for 13% of the total outstanding loans from Indian banks. That is the worst concentration ratio in Asia. These groups have gone ahead with overseas acquisitions and most of them have not resulted in great results. 

All this is likely to cap the enthusiasm and capacity of these groups to expand, besides the projects they had decided 4-5 years back and are in execution stage.The energy and water problems discussed above also add to the problems. That raises a serious question mark on the number of job opportunities that will be up for grabs in the forthcoming decade. IT/ITES cannot absorb all.

Given that the average age of the Indian population is in 20s and that millions of them are going to join the workforce in the coming years, it does NOT bode well. 

Government Balance Sheet - 

In response to the 2008 crisis, Govt of India embarked on the spending spree with huge doses of populism. But the dose was never withdrawn even after we were well past the crisis. This turned the long process of fiscal consolidation on its head.
Now when the economy is slowing down dramatically, the government, running a huge deficit, can hardly help even as inflation refuses to come down.Its the stuff of nightmares.


I know I have made it look very bleak, but I am trying to write it as I see it and have tried not to exaggerate one bit. It is not as if the situation is not retrievable. But just that it requires a few difficult decisions, the results of which will be seen in the medium to long term and with a little luck we can recover the lost momentum to some extent. And this where the final balance sheet comes.

Political Balance Sheet - 

This is one balance sheet, where we could have done with a skewed arrangement in favor of one particular group. But the "balanced" nature of this particular balance sheet is ensuring that difficult decisions are not taken for fear of losing control, while the economy and people suffer.

And therein lies the crux of Indian problems...

(DISCLAIMER : The probability of my opinions going horribly wrong is closer to 1 than to zero!!)

Short and Sweet!!

This should get over fast..


Some info on the sugar industry and a possible case for investing in the same:


25 mn. tonnes industry...
Overdue payments to the sugar cane farmers in the range of 8000-10000 cr...highest on record...
Most sugarcane crushing companies have huge debts...and most of them are losing money on today's sugar prices of around Rs. 30 per kg...
Given this situation, government allowed exports to create some liquidity in the system and so that the overdue payments are made to some extent...


Incremental working capital debt should difficult to fund for the sugar companies...
Sugar production is expected to be in the same range as last year...but if sugar prices don't improve, sugar companies will not be able to pay farmers....overdue payments will rise even further....or maybe sugar production might decline...


Exports are likely to drain a reasonable chunk of the inventory....


The other problems facing the industry are the levy sugar, where the companies are required to sell 10% of their production at discounted prices thus incurring losses.....Ethanol that they make also seems to be under priced...


Looking at all this....it looks like higher sugar prices are required....and sugar companies will need to make a lot more money if the farmers need to be paid and banks are to be repaid....


Stock prices for these companies are at multi-year lows...investor interest is also abysmal...but the promoters are keen buyers in quite a few of the stocks...


Government interference has been a bane for this industry...and it continues to be the biggest risk....
SO IT IS NOT RISK FREE....


But at these market caps, the risk-reward ratio looks favourable....


That's it in short....hope the returns are sweet!!

Are We Still Slaves??

Let me start with an innocuous question.
How much of your gross legal income do you pay to the government??


Income tax comes first to mind. Let's take 30% initially.
That is it??
Now lets make a rough guess of how much of your post tax income you end up spending for a decent, not luxurious,  living. 30%, 40%, 50%?? Let's go with 40%.
Here we are NOT talking about the upper class, rich or the super rich. They are not worried about all these things. It's not worth their time.But unfortunately they constitute less than 5% of the population.


Coming back, practically everything that you spend on, except grocery, are taxed indirectly. Excise, customs, sales tax, VAT, service tax etc. and they may end constituting anywhere between 10-50% of the MRP that we end up paying. Assuming an average of 20%,another 5-10% of our income goes to government. Thus the government has already taken away about 40% of your income.
There are n number of other taxes, which I am neglecting for this discussion.
So you are probably left with 40% of your gross income as saving.


That doesn't sound like a bad number.
Let's see what happens with your savings.
They end up with either a bank, insurance company or small savings like PPF/NSC etc.


Banks consistently give you returns way below inflation, reducing the purchasing power of your savings every year. One of the many reasons for the low returns is that government makes it a compulsion for banks to deposit 25% of their deposits in government bonds, which by themselves don't yield high enough. Thus by default,25% of your banks deposits go to the government. We all consider bank FDs to be investments, but in the longer term we are left poorer.
The bond market is almost non-existent with  no direct retail participation, making it impossible for us to search for a better return. In effect we subsidize the government through low cost money.
The story with insurance and small savings is no different with all, but a small portion, the money going to the government.


Off late, even the equity portion of your LIC savings is being played with. Government makes PSU banks pay dividends. Being the largest shareholders, they receive a major part of it. But since banks are in constant need of capital, which is their raw material, government has made LIC substitute for them. LIC has been selling blue chip stocks and been buying PSU banks, with shady balance sheets.
In effect government is withdrawing its own money and asking us to take the risk of a bad balance sheet!!
(just for information, there is a big hole of around Rs.50000 cr. in the PPF/NSC/KVP/PO DEPOSIT schemes, which is not highlighted anywhere)


All this still may not sound bad enough.


What does the government do with all this money? Why does it need more and more money all the time? And more pertinently how does it get away with it??


That the government and it's agents pocket a part of the money is no secret. But it gets away with it by drawing attention away from the financial jugglery going on.


The rule is very simple and was laid down the British. Divide and rule.


Our combustible society was always divisible on the grounds of caste and religion. Government helps that process by announcing various schemes and subsidies which are supposed to uplift the under privileged.


Secularism stands for equal opportunity irrespective of the person's background. But politicians have twisted it, first they divide people on the basis of caste and religion and then announce special packages in various forms in the name of secularism.


I am not against the schemes but if these schemes were indeed good, then they should have died a natural death because the under privileged should have been empowered by now. If it has not happened for 6 decades it is unlikely to happen for the next 6 as well.
That's because the basic intention is to only fool  people in the name of these subsidies and schemes.The government keeps asking for more money for exactly these schemes and it is not questioned.


Examples:
They want to subsidise kerosene, LPG, food grains for the poor. The poor get a part of it but it also creates a big black market for the products and probably also funds lot of political parties themselves.
They subsidise electricity to agriculture, but a lot of theft goes unreported and unaccounted under that guise leading to huge losses and load shedding as well as higher power bills.
This economic mismanagement is the  reason behind the persistent double digit inflation and a depreciating rupee and of course, reduced purchasing power for common man.


Coming back to your savings, we generally end up using them to buy a house, fund children education or something similar.
If you are buying a house, it's very unlikely that a politician is not being paid behind the screens. In fact, the black money comes back to real estate driving the prices higher and making it difficult for common man to own a home.
In effect, the government has used our money and made life difficult for us.


If the child is a genius, fine. Else given the paucity of government seats for graduation colleges, one will end up paying huge donations or capitation fees or very high yearly fees.Whom does this go to?? Most private colleges are either run by somebody connected to the government or is a part of the government itself.
Generally speaking, your savings, at least a big part of them, are again routed back to the government or its agents.


We all , justifiably, feel happy when we buy a car or go on a foreign tour or dine in a good restaurant. But these are all small mercies which we are allowed, so that we don't revolt. So that we live in our own cocoon not realising or at least not objecting, the loot going around.


At the start we did some calculations using 30% tax rate. So what about those below that slab. Their story is no different. Just that they will not be able to save enough.
Very few are able to make the jump from being middle class to upper or the rich class. Others are on an economic treadmill!!


We can replace the word "government" above by "Congress". Given that Congress has been a part of the government for 5 out of the 6 decades since independence, I can't think of anybody fitting better.


The inimitable Bhagat Singh had  predicted exactly this, way back in the 1920s when he himself was only in his 20s. And that's why he opposed the Congress. No wonder Congress sees him more as a terrorist than a freedom fighter and an outstanding thinker. What he could not have probably imagined then was that it would be a foreigner having absolute control over things 6 decades after independence.


So now let me reframe the question asked at the start.
Over your lifetime, how much of your income is taken away by the government, directly through taxes or indirectly through inflation and mismanagement?


And going by the answer, you can probably decide if you are an economic slave or not.


(I am by no means an original in this thinking process. Great scholars and minds have already highlighted these issues centuries before. I am  just trying to see and present the Indian version of it)

Gold Loans - Part II

Gold loans were discussed in October 2011.


Gold Loans


In a recent development RBI has imposed certain restrictions on the operations of Gold Loan companies. I am putting them out in short:


1. LTV (Loan-to-value) ratio <= 60% on all gold loans.
2. 12% Tier-I capital adequacy for all Gold Loan NBFCs by April 2014.
3. No lending against gold bars/biscuits. Only jewellery allowed as collateral.


Very heady growth, high RoEs or umpteen new entrants??..difficult to pin point what exactly would have been the reason for RBI action.


High RoEs are a big function of asset quality. As we have discussed, gold loans are almost AAA standard loans (unless lending was done at 85%+ LTVs). Good quality assets, even if growing fast, logically should have not worried RBI. 


Moreover, the industry as a whole is drawing people away from the pawn brokers, who charge exorbitant rates on similar loans. So it had some social benefits as well.


So then what prompted RBI to take such severe action??


Maybe we should just step back and have a look at the broader picture.


Muthoot Finance was expected to end the year at 26000 cr of AUM. As has been discussed in the previous article, this would have roughly meant that Muthoot has disbursed around (75000 cr of loans in the year, taking on an avg of 4 months tenure as per company provided information)
If Muthoot is 20% of the overall organised gold loan industry, that would have meant a rough disbursement of anywhere between 3.5-4 lac cr. in FY12. That number would have meant that gold loan NBFC/Banks were giving short term funds to support approximately 4-5% of India's GDP!!! And this was only the organised sector!!!


The calculations can be slightly off, but the quantum is probably enough to make RBI apprehensive, I think. 
What may have added to RBI's anxieties is that the end-use of all such loans is not well documented. Given the fungibility between cash and gold, I would think, it was discomforting for RBI to see the kind of numbers that were being talked about. 
(I am personally very sceptical of asset size and growth being talked about, but I have been wrong many times before)


Attractive RoEs lured many new entrants.That would have increased the probability of mischief.
 
I, unfortunately, cant read RBI's mind. But what I have outlined above, could probably have been the triggers for RBI to come up with some action.


These restrictions are sure to dent the business prospects of all involved in the industry. They may hurt newcomers more than the well settled ones.
The size of the effect and how long will they last, is still not clear to me.


"All that glitters is not gold" is very clear, though!!

Next Time: INR may not stop at 54...

I am always confused whether its good to have a provocative or sensational title for an article. What if the content is miserable and fails to keep excitement of the title going??


On the other hand, an eye-catching title gives you a better chance of exciting the viewer enough to, at least, read it once. You may call it the "Times Of India" strategy. After that, the content takes over and I have a chance to prove that the article and its title, both, were justified.


In short, its a double edged sword.


I do not know if the title excites you enough but if you are reading this line, its purpose has been served. So I quickly move on to the topic itself.


I have written before on INR at various points. In this article, I will try to put my point with the help of a few indicative charts.


At the very first lets take a look at the historical Current Account Balances.

                   Souce : Bloomberg


As can be seen, trend-line Current Account Deficit (CAD) has zoomed in the last 3-4 years. This is the result of "consumption" boom, without a parallel manufacturing/production/mining (whatever it is called as) growth.


Now lets look at the historical chart correlating the USD-INR with the CAD.

                    Souce : Bloomberg
                             (White line - CAD, Orange line - USD-INR)


Persistent CADs ensured that INR kept depreciating through 80s and 90s. This included the 1991 currency crisis, where RBI and Central Govt were left with no option but to devalue the INR substantially.


But then came the first decade of the 21st century where the trend-line CADs  were under control. INR actually went through a period of appreciation against the USD starting from 2000 to early 2008, thanks to the burgeoning foreign exchange reserves. These reserves were a big function of FII/FDI inflows and some external foreign currency borrowing as well. Have a look at the chart below. 

                                         Souce : Bloomberg
                                        (White line - CAD, Orange line - USD-INR, Yellow Line - Forex Reserves)


Then came along the global crisis in 2008. FII inflows dried up and crude oil also shot through the 100$ mark. INR suffered. It went all the way from 40 to 52 in no time.

Since March 2009, with the world flush in fresh liquidity, FIIs came back, crude oil was at reasonable levels and Indian government threw all fiscal caution to the winds inducing a domestic consumption boom. 
Over and above the FII/FDI inflow, foreign currency debt was also coming in.



But this time, forex reserves did not oblige (at least not till now) and remained essentially flat.


In fact, after having reached a peak of about 320 bn USD, reserves have gone down to closer to 290 bn USD. All this has been a function of the sustained CADs that the consumption boom has induced.


Lets have a look at the final chart:

                      Souce : Bloomberg
                                 (White line - Forex REserves, Orange line - USD-INR, Yellow Line - External Debt)


Early 2008, external debt was a good 100bn USD below the forex reserves. Now the external debt is above the forex reserves.
We are still running reasonably big CADs. Our savings rate has been going down. Our dependence on foreign inflows has magnified in the last few years. Its almost like living on the edge, or at least very close to it!!


The slightest hint of a crisis globally and INR suffers. We got a glimpse of that in late 2011, when INR went from 44 to 53 before anybody could blink.
RBI used all its levers to pull it back. But that came at the cost of domestic liquidity. And that also means that there are not many arrows left in RBI's quiver.


There are the usual saviours/hopes:


- Crude oil crashes to 90$ or below.
- FII/FDI keeps pouring in to fill the gap left behind by the trade deficits.
- Gold imports collapse.
- Governance improves dramatically.


As things stand now, the next time a crisis comes, INR may not stop at 54!!!


As I suggested earlier in the article, I am playing with a double-edged sword. I hope not to get my head chopped!!

Crude Oil : What next??

We have discussed Brent Crude on the 10th of January.


Crude Oil - Big Move

Thankfully this was not as horribly disappointing as the call on the Nifty :)
125$ has not been touched yet. But the basic directional call has been proven reasonably fine. So I thought, maybe its not a bad time to see if the call can be taken further.

   Source : Bloomberg


So ATC moves on and has managed to visualise a standard "flag" pattern. That can be seen in the white coloured parallel lines on the chart. "Flag" patterns are supposed to be consolidation moves for a previous move and the slope of the "Flag" is generally opposite to that of the previous move.


In this case that move happens to be the one from roughly 80$ to 125$ for Brent. Then we have now had a one year weekly "Flag" pattern. Brent has now broken out of the downward sloping pattern.


This would suggest Brent is headed for a substantial move, as "Flags" generally are a continuation patterns. The path of Least Resistance also suggests a move up.


But ATC suggests we watch out for the 125-126$ levels for Brent. That is where it had stopped last time. So it will probably find it a little tough to overtake that. (Unless there is Iran war tomorrow). If those levels are taken out convincingly then we might be headed for life time highs.


But technical analysis has ways to fool people and requires expert eyes. ATC surely doesnt have those. Maybe its not a bad idea to just keep seat belts ready....!! 

Pizza Mania!!

Every now and then comes a story which catches everyone's fantasy. Creates frenzy like there is no tomorrow or as if there is nothing else which is good enough to be paid attention to. I dont think it would be an overstatement if I suggest that Jubilant Foodworks is one such story.


(Disclaimer : I have tried my best as far as background work is concerned before writing my opinion/observations here. But would be grateful to readers who find out any mistake and point it out, particularly silly mistakes. They really make one look like a complete idiot. I will be really obliged.It also helps avoid future mistakes!)


For the uninitiated, Jubilant Foodworks runs a highly successful pizza store chain by the brand name, "Dominos Pizza". It has a particular focus on the home delivery business and has set new benchmarks there.
Rising disposable income, favourable demography and changing palates have helped create a story, which could not have been missed by any investor in the Indian markets, domestic or foreign.
Fantastic growth, great profitability and a raging bull market have taken Jubilant Foodworks to dizzying heights, looking eerily similar to the one time favourite technology stocks in 2000.


As I said, no investor would have been left untouched by this story and I am no exception. But writing on such a well discovered story and attracting attention will require that I come up with something that has not been discussed before, or at least I think has not been discussed before. 
I hope what I have written below is ,at least, worth the time spent in reading it!!


-   Dominos had 306 stores as of March 2010 and ended March 2011 at 378 stores. So roughly 342 stores were operational for the year FY11 on an average.If we go by the number of pizzas that were sold, as per the information in the Annual Report, it roughly comes out to a number of 300 pizzas sold per store per day. Going by the growth numbers in the first nine months of FY12, this number should roughly be around 350 for FY12.


  If the company is averaging 350, I think it would be reasonable to assume that the mature stores in cities like Mumbai, Bangalore, Delhi etc would be clocking closer to 450-500 pizzas per day on an average, with stores in smaller towns clocking lower volumes. The stores are open from 11am to 11pm. I think its fair to assume that out of these 12 hours, roughly 10 hours would constitute almost the whole volume with some part of the morning and late afternoon being really slow.


 That roughly means around 45 pizzas in an hour. Company has indicated that roughly 50% of the volumes are towards home delivery and the remaining are dine-in orders.Going by that it looks like a pizza is delivered every 2-3 minutes. So a bike moves out of the store every 2-3 minutes. If there are 2 pizzas per order, it would be 5-6 minutes. I have to say, these numbers are really fascinating and suggest how frenetic a place the store would be.And mind you, these are average numbers, the peak hours would be even more exciting!!!


And can you imagine how it will look once the store volumes grow by another 15-20% next year, which is what the company seems to be indicating right now.




-   As I have said before, Dominos specialises in home delivery and thus has smaller stores. My guess is that the average size of the stores is around 700 sq. ft. (Its a guess, if somebody has better calculations, it would help). The company paid a rent of about 53.6 cr for FY11. If we take the average number of stores calculated above, average size of 700 sq. ft., then some mathematics would conclude that the average rent paid per sq. ft per month is around Rs. 186!! (I pinch myself every time I read that number!!!) 


-  Dominos requires roughly 8 mn Rs. for every new store that they open.Given the modest interiors of a Dominos store, I think its safe to assume that it will not cost more than Rs 1000 per sq. ft. of interiors. They need to have around 25 bikes for the deliveries. So roughly Rs 7 lacs for the interiors and 8 lacs for the bikes. So about 60-65 lacs is spent on the kitchenware, which will include ovens, freezer, cutlery etc!!!  I am sure its worth that much money!!


-  The final interesting observation is the "Sundry Creditors". If we were to compare them with the "Raw Material Consumed", it turns out that they get a credit period of around 6 months!! It is called the "economies of scale"!!


Jubilant had done a successful campaign called "Pizza Mania".
With the stock trading at close to 60x P/E on FY12 , "Pizza Mania" is well and truly on!!!


Enjoy while it lasts!!! :)

NIFTY and INR - Up or Down??

I wrote this in November:

Meltdown

Obviously there could not have been a bigger "sucker" call and my technical and market timing skills leave a lot to be desired. :(

But if I say, the call went wrong on the timing front then do I still stand by the call of a big market fall? Read on....

Lot of things have happened in the last month or so.

- Rupee touched 54 in December, but we had a big rally back to around 50 today. 

- Markets bounced back with a vengeance. FIIs have bought quite a bit, not only in the equity markets but the debt markets as well.

- European problem seems to be dragging on, though the worries seem to have subsided a bit.

- RBI has come out with a CRR cut to boost liquidity.

Those look like a lot of positives.


Rupee appreciating is a positive for FIIs buying into the Indian markets. It adds to their dollar returns. But while INR has appreciated in the last 4 weeks, what I find intriguing is that forex reserves have continued to head down in the same time frame.This is despite all the FII inflows.

European problem may have taken a backseat as far as the equity markets are concerned for the time being, but by no stretch is it being close to getting resolved.


RBI cut CRR, boosted liquidity, but also for the nth time warned the government to control its fiscal position, which looks to have completely haywire.RBI has already done Open Market Operations (OMO) to the extent of around Rs. 70K cr, and the system is still short on liquidity.


So there are positives around but fundamentally issues have not been resolved and are not close to being resolved either.


With all this as a background, I find it difficult to build a case for a sustainable rally in the market. In fact, the shape of the corporate balance sheets in India makes it even more difficult to imagine a bull run.A lot of cleansing is required to build a good base for the markets to head sustainably higher.


So as of now, I continue to maintain my stand. (Hopefully I will NOT end up with egg on my face yet again!!)


- Stock markets will find it tough to rally from here. They might have just finished a big bear market rally. And they should be headed substantially lower from here.


- I had written this on the USD-INR equation


USD-INR

Most the "Drivers below 52" seem to have worked in the last 4 weeks. I will not be surprised if the "Drivers above 52" start making their presence felt.


I finish here. Hopefully I will be able to have a little more confidence when I write next and that is possible only if I get these calls right!!
Wish me luck!! :)

Crude Oil : Big Move Coming??

The amateur technical chartist (ATC) within me has taken control and come up with something. I am sure a simple chart has been converted into something really complex and exotic. But that is what amateurs do, right?? 

               Source : Bloomberg

As can be seen, ATC has managed to draw three channels in the weekly chart of Brent Crude, Yellow, Purple and White. 

Brent has spent the maximum time in the Yellow channel.It has huge deviation on the upside in 2008 and on the downside in 2009. But after having spent some time in the Purple channel, it has managed to get back to the Yellow one.

While it spends time within the Yellow channel, Brent has managed to move within the White Channel for almost the last one year. 

In this one year Brent has broken the lower end of the Yellow channel thrice and every time it has not sustained below the channel.It has taken support at the lower end of the White channel and bounced back into the Yellow Channel, on all occasions except the last where it turned around halfway through the White channel. Purple channel supported the move.

As ATC sees it, Brent is getting squeezed between the lower line of the Yellow channel, which has a positive slope and upper line of the White Channel with a negative slope.

It has been a year since Brent has traded in the range of 100 to 115$, with one exception where it went past 120$.

This one year squeeze will in all probability lead to a big move. Direction - Up or Down?? ATC knows charts dont tell which direction they are going to take. So he goes on to make a guess.

 

In the last one year, every time Brent has tried to move below 100$, it has bounced back helped by channels as elaborated above. ATC applies the theory of "path of least resistance", and comes up with odds favouring a move on the upside with the first target being 125$.

ATC does not bother about fundamentals because that gives a prejudiced reading of the chart. The fundamentals are swinging wildly between a slowdown in Europe/China, saber rattling by Iran and limited spare capacity within OPEC.

Markets factor in all the available news and events, and tell the story through the charts. It is up to us to read it properly. 

I can only hope that ATC has done a decent job of reading it!!

Gold - A Big Fall Coming ??!!

At the outset, I wish you all a Very Happy, Prosperous and Healthy New Year!!

I am back to gold this time. It has been a very interesting 2011 for gold and I thought that a few things were worth mentioning. 

Gold started 2011 at around 1375$ and ended it around 1550$. 11th year in a row of positive returns. That is a BIG bull market. But what happened in the second half of 2011 PROBABLY indicates the direction gold may probably take in 2012. 

What the starting and final quote of the year 2011 for gold does not tell us is that has touched 1920$ in September 2011. Ballooning deficits and money printing central banks had set it up nicely for gold. 

Greece was on the verge of default in September, when gold touched 1920$. 

Soon enough, Italy came with its own version of the problem in November, which was of course, far more serious than the Greece issue. Gold touched 1800$. And a little later in December, the European Central Bank came out with its bazooka, almost.Gold touched 1750$ then. 

Almost everything in the paragraph above is positive for gold. But with each incremental positive news, gold kept making lower price marks or "lower highs" as a technical analyst would call it. Once the positive news flow subsided, gold started dragging down and ended 2011 around 1550$. 

So there is a little more to gold in 2011 than just the 12-13% return it generated in the year start-to-end.

From Greece to Italy and quite a few other nations facing similar problems, gold should have ended the year much stronger. Almost everybody was and is still bullish on gold.The latest survey by London Bullion Metals Association has indicated that people in the trade expect gold to cross over 2000$ in 2012.

But gold prices seem to suggest that we are PROBABLY headed for not a such a great 2012. I will not be surprised if we end up seeing a quote of 1200$ or lower sometime during the year 2012. 

IF, and its a big IF,  that happens, does that signal the end of the long bull market in gold??

Well in December 1974, gold touched 185$ and then went to go as low as 105$ in August 1976. That is a fall of more than 40%. When we are talking of a fall from 1900$ to 1200$, it is not very different.

But August 1976 to December 1979, gold went on to touch 800$!!

So even IF gold does fall to 1200$, we should be careful with our opinions.

All this while, we have been discussing gold prices in USD terms. So what does this imply for gold prices in INR terms. Now that becomes quite complicated because it has to deal with USD-INR exchange rate.

I have discussed that before. In fact it was just the preceding article.

USD-INR Exchange Rate

I found it easier to make a guess for gold prices in USD terms but there is a good chance that I will get it wrong, so I will not even venture into trying to make a guess for gold prices in INR terms. 

Let me know if you can figure it out!!