At Yahoo, I write on the Irrelevance Of The Sensex:
In a recent trader meet, a speaker asked on stage where the market closed last. Answers were "4714" and other figures around the 4700 number, but the speaker was looking for another answer. It dawned on us soon that he was looking for the Sensex, which none of us knew even to the closest one thousand.
Read More...Inflation for December 2011 has come in at a 7.47%, miserably low compared to 9%+ figures we have been seeing lately. But the downside is that prices haven’t actually fallen, they have at only been flat compared to November/October.
Read More...From my year-end piece at Yahoo:
2011 would be best forgotten by the Indian markets. Stocks have fallen around 25%, making it the second worst year in market history, after 2008's drop of 52%.
The rupee has fallen another 20% against the dollar. Petrol prices are so high that pumps now sell it in ink droppers. The government has, with little prompting, carefully applied egg on its own face. Corporate profits are dropping dramatically, and RBI continues to hold interest rates high, because honestly that's the only thing that's they can keep high in this country.
Read More...There has been consternation about Foreign Currency Convertible Bonds, or FCCBs recently, and this is a more detailed post on them.
An FCCB is basically like this:
In my first post, I’d asked what you would do if you lost your job. Not too many responses came about, and I think that’s because people don’t think such a thing will happen to them. But obviously they all sympathize.
I won’t claim to be different. There are just a few things that come to mind.
Read More...I make the case at Yahoo for a common stock ticker set.
Have you heard of RELIANCE? Yes, that Ambani company. The fellows that keep arguing about how much gas they're producing. But it's also called RIL. And RELIND. Or RELI.
Whoa, you think. These are the same company? Why so many names? Or, in twitter parlance, "Why U No Call It Reliance?"
Read More...Network 18 has something funny going on. According to me, the company is helping its own promoters buy more shares.
Let me put forth some evidence.
Read More...In Kaushik Gala's excellent essay on creating an equity fund structure in India, he touches upon the regulatory problems in creating a fund in India. This essay takes you through different investment fund structures.
Read More...The RBI has provided rates that banks used to give for one year deposits, all the way back to 1976. Here’s a plot of the “high” rates today (9.25 to 10%).
Much of the 90s was a 10 to 12% rate, and I remember that many bonds (IDBI etc.) offered 12%-14% to retail buyers. (We still own some 17 year bonds at 14% or so, which mature in 2016. )
When you invest in a fixed deposit, the interest you receive is taxed as income. At the highest tax bracket, you pay 30% on that interest. That means a bank FD that gives you 10% really only gives you 7%. Even if you a a longer term investor in the FD, you pay interest every year. (And the bank deducts 10% as TDS before you even see it)
The government has allowed certain entities to give you tax free interest; if you are an investor for the long term, 10 to 15 years, in certain infrastructure companies. Two of them have already issued bonds (PFC and NHAI) and if you missed those, you can subscribe to the next two coming up from Jan 27: HUDCO and IRFC.
| Issue | IRFC | HUDCO |
| Size | Upto 6300 cr. | Upto 4685 cr. |
| Interest Rate | ||
| 10 yr bond | ||
| Retail * | 8.15% | 8.22% |
| Others | 8.00% | 8.10% |
| 15 yr bond | ||
| Retail * | 8.30% | 8.35% |
| Others | 8.10% | 8.20% |
| Minimum | Rs. 10,000 | Rs. 10,000 |
| Opens | 27-Jan-12 | 27-Jan-12 |
| Closes | 10-Feb-12 | 6-Feb-12 |
* Retail applications are for individuals, for under Rs. 5 lakh, and the higher interest rate is only for the first allotment. Any sale of the security will drop the interest down to the “Others” level.
The bonds will list on the NSE and BSE, and if you can’t get in now, you can buy them off the exchange. (PFC and NHAI bonds will list soon) and the interest will still be tax free. However, in the above two issues, the “coupon” rate paid on the bond will drop, for retail investors.
Since the bond interest is tax free, this is equivalent to a high interest yielding fixed deposit based on the tax bracket you are in. That is, if you had an interest rate of 30% at your highest tax bracket, a coupon rate of 8.35% means an equivalent FD of 12.08%.
But this is a silly comparison. There is no liquidity – of course the bonds are listed but there’s no guarantee that there will be someone willing to buy. Even if there is, the price someone may be willing to pay could be far lesser – in terms of effective yield – than the price you want (An FD can always be returned early with no loss of principal and perhaps a little penalty on the interest) This is like a 15 year FD.
You needn’t invest in an FD to get a similar return, of course. If you’re thinking of exiting in a few years, you may be better off with a longer term FMP, where the post tax returns are around 9-10% nowadays. These mutual funds lock you in similarly, and are listed, but the interest is not taxed till maturity; they tend to yield between 9-11% (this is the rate for long term commercial bonds nowadays) and the fact that you get an indexation benefit will make much of the gain non-taxable.
(A 9% return with inflation at 8% means only the excess 1% is chargeable to tax – even at the highest bracket you’ll make 8.70%)
The comparison, for those who are thinking of this bond as a 1 to 5 year investment, is better off with a similar tenure FMP, or if you choose to be a little creative, with a bond fund.
I strongly believe that we have overcomplicated our options. Thinking in terms of “you can’t compare this with a gilt fund” etc. are simply skirting the issue. People like to think in terms of “debt” versus “equity”, and then long versus short term. FD is debt, as is a bond fund, as is a HUDCO bond. If interest rates fall, a bond fund and the HUDCO bond will increase in market price, but nothing changes with the FD. If you are in for more than five years, and believe that interest rates will fall to below current levels, the HUDCO or IRFC bond is a good idea.
If you’re in for less than five years, consider a longer term FMP or a bond fund instead.
If you’re retired, these bonds are fabulous, because they give you cash flow on which you need to pay no taxes. And for fifteen years!
And finally if you’re a short term investor with the idea that you’ll speculate on these bonds, the trade will clear itself when the PFC/NHAI bonds list either Friday or Monday. Wait to see if there’s a listing gain available.
At Yahoo, I write on the Irrelevance Of The Sensex:
In a recent trader meet, a speaker asked on stage where the market closed last. Answers were "4714" and other figures around the 4700 number, but the speaker was looking for another answer. It dawned on us soon that he was looking for the Sensex, which none of us knew even to the closest one thousand. Read the rest of this entry »
The Reserve Bank of India has cut the Cash Reserve Ratio (CRR) for banks, as a percentage of deposits, to 5.5% from the earlier 6%.
This is, they say, to manage the liquidity situation, where banks have been borrowing a lot (1.2 lakh cr. last) from the repo window; this is much more than the usual figures of 40-60,000 cr.
The repo rate remains at 8.5% and the reverse repo at 7.5%.
Banks are up more than 3% over this move, which gives them some headroom in terms of having to borrow less from the repo window. Analysts have said that the increase in 32,000 cr. of “reserve” money in the hand of banks will result in a multiplier effect (lend and take that money as a deposit, lend again, and so on). A multiplier of 5 will result in credit growth of 160,000 cr. which is huge.
But I doubt that, because NPAs are growing as well. In the last couple of quarters, NPAs have gone up 0.5% (till September), and another 0.5% will negate the entire impact of the CRR cut.
More importantly, the sectors in trouble are priority sector (mostly SMEs?) and Agriculture, where defaults are running at 5%. And the above chart is not including the massive restructuring of the Air India debt, the upcoming issue with Kingfisher, the large debt of GTL and then the many infra projects that are currently in limbo. (Since the chart is only till September).
Liquidity easing may just be a front – the real impact of the CRR cut will be that banks will have the cash to provision against more defaults. It is unlikely to create more lending. Recently, credit growth has dipped below deposit growth – another chart from RBI – for the first time since early 2010.
These are interesting times, no doubt. Combine it with a thorn in Greece that is threatening Europe and we find that things are much in flux.
Two things are expected of the RBI today, in their monetary policy statement. One, that it will not raise interest rates – a stance taken already in end November in their mid quarter review – or actually cut rates. Second, that it will effect a cut on the Cash Reserve Ratio (CRR) from the current 6%.
Given the Macroeconomic statement yesterday, it doesn’t seem like both are likely.
on Inflation:
While growth outlook weakens, inflation risks remain
The Growth outlook has weakened as a result of adverse global and domestic factors. However, inflation and expectations of inflation remain high and upside risks emanate from exchange rate pass-through, revisions in administered prices and higher-than-expected government revenue spending. Consequently, monetary actions will need to strike a balance between risks to growth and inflation.
Growth in 2011-12 is moderating more than was expected earlier. The business climate has weakened. The slack in investment and net external demand may keep the pace of recovery slow in 2012-13.
While in the short run, moderating inflation will provide some space for monetary policy to address growth concerns, in the absence of structural measures to address supply bottlenecks, this will be, at best, a temporary respite. In addition, the expansionary fiscal stance has emerged as an upside risk to inflation.
And later
Inflation is trending down, but upside risks remains significant
Inflation is moderating led by sharp decline in food inflation and is broadly in line with the 7 per cent projection for March 2012.
Primary food inflation declined sharply reflecting seasonal fall in vegetable prices and high base. However, as protein inflation continues due to structural demand-supply imbalances, the decline is expected to be short-lived.
Inflation in non-food manufactured products remains persistently high, reflecting input cost pressures, partly resulting from the rupee depreciation that has offset the impact of softer global prices of some commodities.
Upside risks to inflation persist from insufficient supply responses, exchange rate pass-through, suppressed inflation and an expansionary fiscal stance.
When you hear language like this you don’t think “repo rate cut”. You think, “wait and watch”. The language for repo rate cut is - “Growth has moderated significantly while inflation risks are benign”.
On Liquidity – that it is too tight will mean that they will cut CRR:
Monetary growth keeps pace even as money market liquidity tightens
Money market liquidity tightened significantly since November 2011 partly due to dollar sales by RBI. However, monetary growth has kept pace with projections, on account of a rising money multiplier. The liquidity stress was handled by the Reserve Bank by injecting liquidity through open market operations, including repos under the LAF.
Credit growth slowed below the indicative projection due to demand as well as supply side factors. Demand for credit weakened in response to slack in real activity. Supply also slowed down with rising risk aversion stemming from deteriorating macroeconomic conditions and rising non-performing loans.
(Emphasis mine)
What they mean is that liquidity is tight not just due to the economic tightening but due to the selling of the dollar by the RBI (which takes rupees out of the system). We don’t know the extent of that selling yet. Therefore, the OMO auctions – where the RBI pays rupees and buys government bonds – is essentially replacing that lost liquidity, and until they fully replace it RBI won’t really know how bad the situation really is on the liquidity front.
Overall, the CRR cut may not happen (such things are never temporary) until the RBI is reasonably sure that the liquidity issue is beyond what the RBI is doing by intervening in the forex market.
I may be wrong. We’ll know in 15 minutes.
The week ended Jan 20th has seen the market up more than 9% for the month, in a recovery that is as stunning as it was unexpected. With 2011 going down more than 24%, January has pleasantly surprised on the upside. In a tweetup with market commentators in Bangalore, I suggested that the lows weren’t yet in because of the lack of panic – and one of the members responded that the panic season is over, and this was the lull before a big upmove.
Now bear market rallies of 10% and20% are hardly unknown. In the last year alone, we have had two such rallies. Is this currently that kind of a rally? Will it fizzle out right now, or stick around?
The answer can be in the fundamentals or the technicals. So look at the
To put it mildly, we’re not in great shape. Seventy two companies have revealed results (till Saturday) and the situation is like this:
While revenues are up 33%, the increase in expenses have matched that, and profits are up just 0.01%. This, despite a stellar performance by banks, which seem to not be recording any of the high NPAs that are usually associated with a slowdown in the growth of the economy as witnessed recently.
The problem started in September. Q2 profits, after all companies had revealed results, showed a dip of over 30% in net profit. (This is after ignoring the one time huge profit made in September 2010 by Piramal Healthcare when it sold a division to Abbott, an entry that would have made the dip seem much worse).
This is now exacerbated by macro factors.
1) The Fiscal Deficit is wider by over 1% now, as tax collections have just not met targets. Essentially we haven’t been able to make that 100,000 cr. that was made the year earlier in the 3G/BWA auctions. This means that the government will try to cut spending to keep the deficit down and to reduce further borrowing.
2) Liquidity in the Banking system is very tight. Over 150,000 cr. is borrowed overnight in the repo window nowadays. While this slackening is good to bring down demand and inflation, it does have a negative impact on growth in the medium term.
3) Europe continues to be in a mess. The situation in Greece gets worse every week, as they negotiate with borrowers to take a huge haircut on their bonds – some say as much as 68% - and roll over existing debt to something that will be paid out over the next few years instead. This has the additional requirement of needing to be “voluntary” in nature, which will not trigger credit default swaps (a trigger means the banks – the sellers of the CDS – will have to pay; and they simply can’t afford it). The failure of these talks – or subsequent ones – can lead to Greece leaving the Euro, with not only disastrous consequences of itself, but with scars on banks across the world. Worse, the world will shift to Portugal and Ireland, which will demand a sweet deal (if further attepts to save Greece are taken) or threaten to leave the Euro together. We would be naïve to think that India is not affected –it will be.
4) There is no government action. With public policy going down the route of populism in the face of big election months, and the government unwilling to sit down and make tough decisions, the uncertainty that has given investors jitters persists. Unless there is a strong leadership change, I doubt the feeling of “what are we doing?” will go away.
Positive notes:
1) Inflation seems to be easing. With a sub-8% print for December, inflation seems to be looking better. This has ramifications for interest rates, which are expected to come down in the year once inflation has moderated. High rates have caused interest costs to rise and dampen profits and growth.
2) The rupee has recovered. To nearly Rs. 50 from Rs. 54 to a dollar, and much of it is through the RBI action of selling dollars. Also it seems foreign investors have put in over 6,000 crore into equities in January.
3) Growth isn’t stunted. The Purchasing Manager’s Index (PMI) and the Index of Industrial Production (IIP) have both shown strong growth figures, even if I don’t trust the IIP that much.
4) The economy is still strong. While we focus on numbers like 8% or 7%, the nominal growth of the economy is over 15%; our GDP has doubled since 2006. The momentum that this kind of growth creates will ensure we don’t stop suddenly; just inertia will have us grow enough to be the envy of western economies. However, if we do slow down, then starting the process again will take many years (again, inertia comes against you).
5) Finally, valuations are low. With the markets reaching lows of 4500 on the Nifty, the valuations at 16 to 18 P/E are much better than the 20+ P/E ratios we have lived with in the last five years. Even then, one has to be worried: EPS growth has come down to 10%.
Now on to the technicals. Prices tell you a lot, and it looks like the resistance on the upside is at the 5100 level. The 200 DMA is still higher though in this move the Nifty has moved above everything else. The MACD – discussed earlier in the Chronicles – still shows that we have some more to go before we either consolidate or reverse.
Long time readers will also notice the W bottoms and M-Tops. The recent was a nice little W-bottom with a higher low, but if you had followed B-Bands the strategy of w-bottoms has not always led to a rally. In fact there have been many instances of one getting stopped out recently. (which is why it’s so important to stick with a system – one big win is greater than a few small losses!)
The other thing we’ve spoken about – the number of stocks above moving averages – is a very useful sentiment indicator. The indicator needs to dip downwards before a reversal in the index, and it’s currently at a very high level (though has not yet turned).
The distance from the 20 DMA has also reached new highs, as the bounce has been vicious and fast.
On the bearish side, we have a McClellan oscillator that’s at one extreme. This signals a reversal but is not usually the only indicator (you have to confirm this with other indicators).
So technically speaking we may have a little more to go here, before we can say if sentiment is changing. Remember that technical analysis is not about prediction, it’s about working the probabilities and the expected returns on each alternative.
Where am I? I’ve been out of the trade for longer than I’ve wanted, but it looks to me like the real money is in the short side. That is, we have reached a level where it is unlikely to go up a lot, but is likely to go down a lot. The only thing that prevents me from taking a large position is that too many people are expecting the market to fall.
I mean that. When a substantial majority is on one side of the trade, the markets usually go the other way. It was apparent – in hindsight perhaps, but I had tweeted about this in mid-December – how everyone was bearish (including me!). The expectations were only between a) will we fall a lot? Or b) will we fall a little. That, and the warning sign in the tweetup meet in Bangalore – where I was told that sentiment is rock bottom – should have forewarned me. It still seems that way – that most stock market participants continue to be bearish, including me. But this may be the beginning of a huge rally, with a few stops in between.
But slowly, things will align together if that is so – imagine that Europe resolves itself at least for the next two years, there is a recovery in China, our interest rates go down, inflation soothes itself, the government decides to go with some good reforms…all this, together, is unthinkable today, but it could be small, tiny moves that eventually lead the way. My point: I doubt it, but if these signs come along, I’m not going to fight them.
IPOs have gone down massively in the recent past (see IPOs largely suck in 2010-11) and a large number of them have gone down over 80% from listing prices. Many are small issues, manipulated up on the first day, attracting investors, only to later slump to levels hitherto unheard of. SEBI now has announced norms to curb misuse of the listing day freedom.
To plug the high volatility, all new listings will have circuit limits from day one (currently, there’s no circuit). A new listing post IPO will have an auction similar to the pre-trade auction for one hour, where you can enter limit or market orders which won’t get executed until the end of the auction hour. The best price is then found by matching orders and the “equilibrium” price is used as the open for the subsequent part of the day (with appropriate circuits in place).
And then, for IPOs of less than 250 crore, the stock trades in “Trade for Trade” segment – meaning, you pay 100% margin for all buys, and you can’t sell unless you own the stock (no intraday short sells). Trade-for-trade applies for the first 10 days, only for IPOs less than 250 cr.
While this is a good step, what it will really do is to move the manipulation to the first day AFTER the curbs are removed. However, the signal that SEBI is watching may just be enough for operators to stop the rampant abuse of the system that is currently happening. I think we simply need more IPOs, from the likes of Indigo airlines to Flipkart to Tata Capital, to fuel capital markets (and interest back into IPOs). I really don’t get the concept of selling IPO stock at a huge premium – it’s better to conservatively place stock and then make the big money on a follow on issue a year later. Sadly, we are all greedy pigs.
Reliance Results in Graphs. I think this is the best way to view these things.
Revenues are up, Profits are down.
Copyright (C) Deepak Shenoy 2011
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