Archive for July, 2008

Firstly - fantastic upmove. In the last week, the markets have gone up some ridiculous 18%. Which is good, because a bounce was expected. There are a number of "reasons" for it - including the government vote, whatever. The reasons are always available after the fact.

Excellent move now, and where do we stand? We're still below the 200 day moving average - which is somewhere around 4800 on the Nifty. So technically, we should hit somewhere around that before we start the slow grind downwards again.

We're still going down, I think.

The U.S. problems aren't topping just yet. From Calculated Risk, it seems mortgage rates for loans are now reaching the 7.8% mark for "jumbo" loans.

Some of these people could just about make a 0% interest payment (i.e. only principal) for the last two years. Now they are expected to pay principal + 7.8% interest. This has literally taken their monthly payments up 25% or more, and given that their houses have lost more than 25% in value, and they have very little or no down payment, these guys are bound to default. I remember reading that most "resets" - the end of the zero interest period - was set to June/July 2008.

This means this is the last quarter that the big banks are going to have "decent" results. Freddie Mac and Fannie Mae are fairly screwed; they have $5 trillion worth mortgages, many of which are defaulting, some say the hit may end up being nearly $1 trillion. (read the comments here). They have shareholder equity of some $80bn together - means they have like leverage of 60 to 1. The other part of the money is debt, some of which is held by China and Russia, who hold it as part of their forex reserves (in FannieMae/FreddieMac bonds).

To give you an idea of what a trillion dollars is - that is the GDP of India. That is more than the market capitalisation of all the stocks on the NSE, put together. Obviously that is a lot of money. The US has just passed a bill giving the government a blank cheque to save the GSEs (as the Freddie/Fannie types are called) - meaning the government can lend them more money or buy their shares. Either ways they aren't going to let the debt get hurt - that means they will protect bondholders as much as they can. The stocks are likely to end up going to zero.

If that happens or not, the GSEs are going to be loath to take on more MBS or mortgage bonds. That increases the cost of carry for the banks who perhaps have hoped FRE/FNM would buy the mortgage bonds of the loans the banks carried - and the increased cost of carry will impact the retail interest rate, which means they are going to hurt the homeowner more - simply put, they'll jack up rates, people who were ok to pay will suddenly not become ok, and thus, more foreclosures.

The other impact is a falling dollar. Not against the euro, which is as screwed as a region and a currency going forward. But against Japanese Yen, Indian Rupee and most importantly against the Middle east currencies. The US may be a great country but there's no way it can literally double the national debt without flushing some value out of the dollar.

Inflation will soon no longer be a concern, I think. The issue will be deflation. And while I hope that concern is limited to the US, it is very likely to spread to Europe soon. This is going to be a bigger crisis than I thought - deflation is not easy to fight.

Given all this I have little hope that the Indian markets will stand out as a knight in shining armour. Our growth story needs a recession just to be a growth story going forward. But I am trying to brace myself for a lousy two years ahead, and would focus on "income" strategies rather than "capital appreciation".

If you are reading this blog you are already the 1% of the population which is not going to be ultra affected - a recession affects the poor first, and then the affluent - and your biggest problem might be stuff like no one giving you a decent rate loan to buy a house, or the lack of enough shops in the mall nearby. But for many people it is likely to be a matter of survival, and in the political theatre of today I would expect even a violent impact - think of a "Sena" attacking anyone who seems well off. I hope it doesn't get to that, but I am watching out for signs of right wing activity.

One thing I am very happy though. The stupid left is out of the government. Yay. Unfortunately it changes very little; this is like playing cricket without a crotch guard - you are focussed more on protecting your vitals than on scoring runs. We aren't going to see much in the next year - perhaps a little here and there, but the big policy decisions will have to wait for the next round of idiots.

Vikram Murarka on the upcoming rupee futures:

The lot size has been kept at a mere $1,000, which is just about Rs 42,500 at today’s rate....To put things in perspective, the value of one lot of rupee futures is going to be half that of one lot of the Mini Nifty.

...Corporates are supposed to access the market only to hedge their forex exposures, not for speculative purposes...Cut to the futures market. Since there will be no delivery involved, all the trades will be termed speculative....even if a small exporter were to ‘hedge’ himself on the futures market, when it comes to realising rupees against his dollar receivables, he would still need to transact with a bank, which would charge him a steep 20 paise per dollar... let us suppose that skilled speculative trading gives rise to profits. Will corporates want to pay capital gains tax thereon...RBI’s report prescribes a client level open position limit of $5 million...

(Emphasis mine)

Lots of issues, but definitely better than no futures at all. Hopefully the RBI will react fast to market action and change or ease regulations accordingly.

This weekend I thought I'd go back to my posts long long back - my patience ran out at 2007 - and see if I had made grand and silly predictions about the great future, and how those predictions panned out.

Someone told me recently that the 4 most used words in the Mumbai Stock Market are "I told you so.". And I hate that phrase. So this is not an "I told you so" funda - it's just a personal report card, to see how the statements of a a random stock market viewer like me have panned out. It means nothing more than that I got bloody lucky.

Jan 2007: The lack of irrational exuberance

No irrational exuberance yet. Everyone's a skeptic. Everyone's a muh-bola-bear. This is the time for smart investors to buy, and buy into the right shares. In fact, there will be small, healthy corrections every few days - choose that time to buy.

...I bought BHEL at 2120 on Jan 15; simply believing that a strong order book deserves a better valuation. .... most likely I will sell if the share moves beyond 2800 within three months. [Which I did, later]

...

The sun has not set on the bull market. Not in this year. I have bought an exchange traded fund, the NiftyBEES, which tracks the Nifty- I believe that within three years, I will see a return of 50%. Individual stocks of course, are bigger growth stories than that; I'm buying my picks.

Hmm. The Nifty was at 4100 then (and it's back to that level now). In the interim it had gone up 50%, to 6300, so technically I'm on reasonable ground there. I haven't sold my NiftyBEES (not all of it) so I'm also technically stupid. BHEL did well, so did Reliance, but not DRL. And the sun did not set on the bull market in 2007, so I give this post +5.

Feb 2007: Is the Nifty Overvalued?

The Nifty trades near its all time high, at 4214 today. Is this too high? We have come up more than 60% from the June 14, 06 low of 2632. Everyone seems to be skeptical and is waiting on the sidelines, but is this market really overheated?

...

I expect the budget to boost earnings, but pare down speculative growth. That will probably not affect the Nifty very much, and almost definitely will push earnings growth to stay at current levels. That leaves room for growth from here - the market is at a high, but it's definitely not overvalued.

Ok, sorta reasonable in the short term (1 year timeframe). So +1 perhaps.

March 2007: Big dips: how to choose stocks in a downturn

Reliance and IPCL will merge and the benefit will entirely go to Reliance....At the current price of Rs. 1285, RIL shareholders will have a company of P/E 15 or so - which, at the rate it's been growing, is remarkably cheap.

...

Bajaj Auto at 2500! It was up to 3000 a couple months back! But that is no reason to buy, because 3000 could have been simply too high an expectation.

...interest rate hikes and slowing growth in retail lending will take its toll, and perhaps SBI will not grow at 20% or more in the next few months.

Reliance is up, Bajaj is stagnant, and SBI did go up to some 2,400 so I was wrong. Net 0 marks. Btw, I still agree with this post: Timing the market is a good thing.

May 2007: I exited Balaji Telefilms at 230, and it's Rs. 168 now, so +5 there. Mentioned SRF target 300 from price 171, and it's at 120 now, so -5. I said Exit all IT and the IT index has fallen from 5250 then to some 3500 now. So +5.

June 2007: In a post on DLF:

Be careful, folks. This is not the peak yet, and we still have to see the buildup of massive exuberance. But it seems to be coming. Be wary, and keep your stop losses handy.

Feel good post. But nothing in there really, so no marks.

July 2007: Sold BHEL at 1650. Sure, it's at 1500 today but it did go to 2200+, but still profit is profit so +5. Exited SRF at a loss (but I already gave it -5 earlier). Gave Infy a target of 1600 (it was 1900 then and 1550 now), +5 there.

August 2007: The subprime problem is worse than we think. That's interesting - didn't remember I wrote it that early. +10.

Sep 2007: Riding the wave. This was my official note of riding the momentum:

Before every steep fall in the market, there has been a euphoric rise. I believe this is that rise for us. If we go up hard, we will fall hard. I'm not sitting on the sidelines - no, that is giving up too much of this opportunity. I'm just giving myself a 10% cushion.

No marks, but feel good.

Oct 2007: More momentum

I'm now up 28%, higher than the index move (finally!).

...

We are in the middle of irrational exuberance. I say "middle" because no one will know the end until after it happens. Yet, there needs to be massive retail participation before it all falls down, like Ring-a-ring-a-roses.

Okay. +5.

Nov 2007: The End Game Begins. And my predictions for the year after last Diwali:

Reasons:

• US financial market is going to collapse. Lots of reasons for that, but I don't like it one little bit.
• Hedge fund redemptions are on and the impact will be visible post Nov 15.
• The new mark to market accounting rules for financial institutions gets visible on Nov 15, and already some banks have revealed assets they own, that they have NO idea what their worth is, and that are greater than the capitalised base of the banks. Duh.
• The Indian market data does not look good. Futures have moved to discounts from premiums, and there is a lot of call writing. The option data shows a lack of big investor participation on the buy side at least.
• Distribution in large stocks, accumulation in midcaps. Yes, the retail investor is getting in. Time to move out and wait for the inevitable.
• Trading distortions all over the world and accounting indicates that investors will churn out their profitable assets (read: India). And this is exactly what is happening.

Ok this sorta worked out. Also mentioned the Ambac/MBIA downgrade impact, way back in December.

In Jan 2008 I ended up buying stocks that went down a lot (and I got stopped out) but also in there was, "our market is overheated. At a 25 P/E we are pushing the envelope. To tell you NOT to invest would be stupid, and I now believe the market has a while to go before we come crashing down.". Both smart and stupid at the same time! Also "Simply sell now" (Jan 18), and I made money from the crash.

Feb 08: Bullish on Gold (not much of a move till now), "I am bearish on IT even now" (silly as IT stocks probably moved up from there) and Nifty not yet attractive (Fab. Nifty down another 25% from there).

That's it. The rest is too recent to grade. Overall I got 60,000 marks. Because I know you don't have the patience to count, and this is my blog and I can give myself as many marks as I please.

It was good to see what I'd written in the past. Just to see if I was off my rocker - and many times, I was - and my transition from this fundamental driven investor to momentum trader and finally to automated trading systems. It's been a fine ride - each of the above have made money for me - and as always, I feel I've just been incredibly lucky. Thanks for reading.

The Sensex closed above 13,500 and the Nifty near 4100 today. Things seem to look good, and suddenly you will start getting calls from brokerage houses and see news of the Sensex on the front page.

Had you stopped looking at the markets for a long time and suddenly found the interest again? Don't bother. If you're looking for another place to sell stocks, this may be your chance. The Nifty P/E is still 17+, and (shudder) EPS is CONTRACTING. Means forget growth, we're struggling to just keep even dammit.

The current Nifty EPS is 233. This is even lower than it was in May - because of bad results. And not just Q4 08, we are seeing horrendous results in Q1 09. The IT biggies have done their thing, and still the EPS hasn't bumped up. What's it going to take to grow 20%? LEt's see- End August 07, the Nifty EPS was 220. That means to go till there we need to be at 264 by end august. Heck, just to justify P/E we need to be at 256 (16% EPS growth, 16% P/E)

With most companies yet to declare results, and potentially one or two huge losses coming from the likes of BPCL, it's looking very difficult. Let's see how it goes - and remember, all that matters is EPS growth. It's not revenues, or income, or profit. It's EPS that matters.

(For traders of course, even that doesn't matter. Only price. Which works for me - we've consistently been doing well the last few weeks; systems are now working to our advantage. We're slightly down this month; a system couldn't handle the volatility and we had to throw it out after some underperformance. But the remaining ones have actually done very well in these times.)

As much as I would like it to move much further I don't have too many hopes going forward. This is a typical fierce bear market rally, which could last a while or just a few days - but volumes suggest there are fresh bakras being herded in and that someone's going to get [more] hurt. But such are the markets. Gotta keep it interesting.

I'm happy being bored to death waiting for my little program to say "Buy X amount of this" and "Sell X amount of that". Bored is better than broke.