Tuesday, October 27, 2009

NIFTY: Is it a Correction or Beginning of a Reversal?


In my last post, I had surmised that we are seeing the signs or footprints of the market teetering on the verge of a change in trend. Whether this downmove is just a correction or beginning of a reversal in the market is the key question.

Answering this question is important because if you are an investor, you need to reallocate the portfolio (you might want to buy gold, for instance; which looks like an excellent choice at the moment). If you are a trader, you need to change the 'bias'. And if you are fans of CNBC 'market expert anchors', then you might want to switch loyalties (curiously, Ms. Mitali Mukherjee starts beaming when the market is going up, and Ms. Shireen Bhan is gleaming when its going down).

There are several factors that will determine where this market is going. Before that, it is helpful to recount how this market got here in the first place.

  • Change in growth outlook. We took out couple of percentage points from the growth outlook in the beginning this year. That on its own accounted for about 40% of the fall in the market witnessed prior to the rise. And surprise, surprise, we added it all back up.
  • Risk Premia. Went straight through the roof, way beyond justifiable. Several percentage points added to the discount rate (whatever you were using to value stocks and other things) and when sanity returned, suddenly everything looked cheap.
  • Flood of money. Critical to depressing risk premia (again) to current, artificially low levels. And boosting growth expectations to, well, artificially high levels.

So here we are. And here is where we are going.

  • Growth outlook. Sanguine, with cumulative factors pointing to a long period of 6% GDP growth (give or take a few bips here and there). The steroids have pushed the flexible parts of the economy as far out as they could. Now the whole thingamajig needs to move forward for growth to happen. The feedback effect between different sectors becomes important after a while for growth to happen. Managing that is a tall order because Government's own fiscal condition is going to become a large drag on the economy.

    Also, you can do a selective interpretation of whether 6% is good or bad or whatever. But it clearly does not support valuations that are 20-22 times earnings for the market as a whole. True, we are not there yet (in terms of valuation multiple). But we will need higher growth for the trot to continue.

  • Risk. Premium will start rising again. The simple reason is that despite the cycle of despair and the euphoria, the state of the global financial systems in terms of asset quality is exactly the same as it used to be before the whole thing began. The poison is still in the system. To the extent that even the pioneers of the "good bank, bad bank" approach are yet to implement it to that canary in the coalmine, Northern Rock. European Parliament is still in the process of approving the split and eventual selloff of the bank. Clearly, the global system is far from fit and the moment the reprieve provided by trading profits ends, things will start looking tough again, on the loans side in particular. Any spike in global risk premia is going to spoil the party for Indians too.

    It's nice to assume the risk has gone away. It has not. And any additional points added to discount rate will make those "attractive" valuations ever "more attractive".

  • Turning the taps off. One of the most hilarious aspects of past few years' inflation debate has been the dance routine performed by regulators around the inflation numbers. Its either commodity inflation, or food inflation or this inflation or that inflation; so long as you can prove that "core" inflation is in check. Well, the inflation juggernaut having run through asset prices, real estate, commodities (one by one), food articles, etc. will finally run over whatever "core" is remaining in due time. The taps will have to be turned off at some time.

    The funny thing is that even turning the taps off is not needed for things to start looking bad. As with all things "stimulative", greater and greater quantities are needed to keep the same thing looking good (that is why you need to keep drinking more and more beer to keep believing that your wife looks good!). So the moment you stop expanding the pool of liquidity, things are going to look ugly again.

I guess the policymakers realize these things. That is the reason why there is so much talk of "stimulus continuing" or a "second stimulus" and so on.

Finally, the timing part. Well, the fatigue of the market has been evident. Nifty has been struggling more and more to make relative new highs. The post election euphoria is more or less over. The results are not disappointing but not earth shattering either (something everyone had assumed). From now on, it is going to be evident that from auto to telecom, from pharmaceuticals to FMCG; it is going to be a slow trudge rather than a sprint to far greater profits.

Still, can we confidently say that the reversal has begun? May be not. The market may surprise with a sharp upmove before settling down to a long, dreary sideways move of chipping away prices slowly. But the winter is certainly looking uninspiring at the moment.

Thursday, October 22, 2009

Foot prints of a Reversal (Is the Bear on the Prowl Again?)


Short answer: Yes. Watch out.

I do not say this because that is the "consensus" among "professionals" and "analysts" out there. Those who have ever gone back far enough on this blog (for reading posts, not for searching who Mitali Mukherjee's husband is, we have a rocking piece on that which still brings tons of hits to this blog, hahahaha) would know why that is the case. There is a solid, fundamental reason why this market went up from March (globally) or from May (in India). And all the analysis behind that you can find in the posts that appeared here between January and March (and not in August, when I just did not post).

Similarly, there are solid, fundamental reasons why this market cannot sustain it any more.

Global Folly: Stimulus Season 2

Let us get it straight. Nobody knew whether the first stimulus would work or not. But it was needed. Put simply, the bloke called "global economy" (or whatever name you like, say "global financial system") had an accident. Blood was spilled and it was necessary to replace all those lost pints. Whether somebody knew it would work or not.

And now? Patient has survived. Even recovered somewhat. But is fat and bloated now (something like a reversal to the original position, though not fully). High cholesterol, high whatever, whatever… you name it. The fix? Give more transfusions! If nothing else, you will balance out the high cholesterol by "averaging it out" with the new, "fresh" blood. Okay, bad pun. But hey, the "new blood" represented by a certain Nobel Prize winner is doing just that, "averaging out" the effect of the old. Anyway, that is a different story. Let's get back to our main discussion.

Did I hear "bad example"? Of course it is! But it makes the point.

So what happens as this bloke is given more and more transfusions? I don't know. Hey, I am not a doctor!

Losing the Plot

The plot was simple. It was broken. Fix it. Get out.

But the choice finally taken is to keep pumping in more and more. Chinese economy vital to global health! Put it on steroids. Now that it has run the course, pump in some more. Same with the US. And of course, how can the rising superpower like India be far behind (I know, I know, those of you global freaks don't give a damn about India. Why don't you just shut up? There are tens of millions of investors in this country who care, besides more than a billion of us around who need to eat, sleep and make merry, well sort of!).

So, the plot is lost. In the meantime, you suffered commodity inflation again (I told you so), stock prices went up (I told you so), spending driven sectors blew the top off the charts (I told you so). The problem? NO, the market is not "ripe for" or "waiting for" a correction, as a celebrated analyst commented on CNBC India today. It is just that sectors that ran ahead of the economy were fired by steroids. The rest of the economy cannot support them beyond a point. The pullback becomes inevitable.

Closing Time

Okay, I will not write more on it today. I think it merits a detailed discussion, on India, on global economy and on China especially.



Wednesday, October 21, 2009

The Comeback

It has been quite some time since this blog has been updated (more than 5 months now). I know it is not ideal to disappear without any warning, information, etc.; but yours truly suddenly quit trading and got into the staid life of paid employment. And as luck would have it (or generally has it, if you believe the brilliant "offisial atyachaar" guys), it left no time for me to even visit my own blog; forget about updating it.

But despair no more! The Compleat Trader is back, not as a trader though, only as an observer and a commentator on the economy and how it impacts the financial markets. In any case, this blog is not a "mass" following blog, very few people read it on a regular basis. But I am really grateful to this set of readers who have been truly loyal. Despite the blog not being updated for five months, it has still maintained a sustained monthly traffic of about 1,000 visits a month! Am truly floored and feel honored. Clearly, there is something that people find of value in this. And I hope I can continue to write stuff that people find useful.

Okay, time to be arrogant! Yes, despite me not following the market, the medium term view has been a thumping success. The last word on this from yours truly was on April 24, 2009 in shape of Indian Stocks: Which Sectors should We Put our Money on? Please take a look if you need some convincing.

So folks, yours truly is back. Of course, it will take him some time to hit the same form again and deliver crackling insights for investors and traders alike. Till that time, please "bear" with me (and subsequent posts will show why the word has been emphasized).


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