FINSURE-Insurance from Financial Problems

RBI Tweaks ECB + Other Norms to Strengthen Rupee

2011-11-24T11:01:00.003+05:30

Dear All,

The RBI has yesterday made some important announcements that could result in a strengthening of Indian rupee and prevent the present turmoil in the currency markets:

1. Reserve Bank of India (RBI) in an effort to support the falling INR has directed Indian companies to bring back offshore funds, raised through external commercial borrowings (ECBs) for the purpose of domestic business expenditure. Those funds need to be parked with Indian banks. This measure is likely hold rupee's depreciation to an extent since over the last few months it has being observed that some exporters and project finance companies seem to be holding back their money raised through ECB in anticipation of further rupee depreciation, however now they have to bring bank the raised ECB into the Indian Banking system.

Thus, as the Rupee-dollar movement is a function of demand-supply. This measure is likely to strengthen rupee against the dollar. Bringing back of money raised from abroad will create demand for rupee against the dollar, which in turn, will help the rupee to rise against the greenback.

2. RBI has hiked the ceiling of ECB rate. Companies can now borrow foreign funds at a higher rate at six month London Interbank Offered Rate (LIBOR) + 350 basis points compared to LIBOR + 300 basis points earlier, for an average maturity period of three to five years. For maturity period of more than five years, rates remain unchanged at 6 month LIBOR + 500 bps. The enhancement in ceiling will be applicable up to March 31, 2012.

The rate hike is aimed at encouraging companies to raise more funds through ECBs. Therefore bring back that money back home in India. In turn, it will prompt dollar selling against the rupee.

3. The Reserve Bank of India (RBI) also decided to remove the upper limit of US$100 million placed on Foreign Currency – INR swaps transactions that the Indian banks enter into as intermediaries for matching the requirement of their corporate clients.

This move will also result in swapping of more dollar exposure by the corporate and allow them to hedge their risk arising form the rising dollar.

Thus, it makes sense not to go with the market speculation and short INR, levels of 52.8 which is the life time high for USD-INR should be considered as a good support level for INR.

Regards,

--------------------------------------
Rahul Sonthalia

Problems with Raising ECB in Current Scenario

2011-10-12T14:38:00.001+05:30

Below is the synopsis of an article published in Business Line. Seems very a very pragmatic solution to the difficulty the India Inc. is facing (other than the Tata’s and the Reliance’s of the world) in raising ECB in the current global economic scenario.

RBI’s latest rationalisation and liberalisation of ECB norms, announced on Sunday does provides emphasis on monitoring ECBs to keep the country's external sector in good stead, however it is shying away from revising all-in-costs ceilings (‘trees') for contracting ECBs, nevertheless, defies reason.

It is not less than 18 months since the RBI last revised the all-in-cost ceilings — referring to the maximum spreads over the six-month London Interbank Offered Rate (LIBOR) at which Indian corporate are allowed to contract ECBs.

· Spreads over six-months LIBOR of 200 bps for trade credit,

· 300 bps for 3-5 year loans, and

· 500 bps for five years and above

These all in cost ceiling spreads against the backdrop of the ongoing turmoil in global markets, particularly following the European sovereign debt woes and downgrading of some big European banks and US sovereign downgrade are making the lending inherently unviable from a lenders' standpoint and are guaranteed to keep out dollar inflows through the ECB route. Among other things, it has led to a huge shortage of dollars, which, despite the S&P downgrade of US sovereign debt, remains the lone safe haven currency that all investors are scurrying to.

True, the situation now is not as grim as in 2008, when banks refused to lend at all, holding on to cash for their dear life. But reports from foreign banks and the foreign offices of Indian banks indicate that dollar funds are hard to come by. Even if available, they are at much higher spreads over LIBOR than what the existing all-in-cost ceilings permit.

This has implications for the ability of Indian corporate – barring perhaps the Reliances or the Tatas – to access the ECB route to fund their trade finance and capex requirements and alleviate to some extent the problems on account of spiralling rupee interest rates.

There is an urgent need to raise the all-in-cost ceilings, especially given the rapid slide in the rupee, which has negative implications for oil companies already grappling with stubborn crude prices. Policy ‘stasis' on this front makes no sense in a volatile rupee-dollar exchange rate environment. On the contrary, the all-in-cost ceiling could potentially be used as a dynamic tool to turn the ECB tap on and off whenever the regulator requires – the ceiling being raised when we want forex inflows and vice versa.

Doubters would, of course, worry about the possible inflationary impact of huge foreign fund inflows in to the system resulting from a hike in the all-in-cost ceiling. However, one must understand that there is already a $30 billion annual cap for the quantum of ECBs to take care of this. Besides this overall cap – which, one trusts, would have been factored in domestic money supply growth calculations – there are sectoral/purpose-tied restrictions on the utilisation of ECBs, which can also address any attendant inflationary consequences.

Moreover, we strongly believe that the money supply based concerns related to inflationary pressures are irrelevant in the present Indian macroeconomic scenarios as the inflation is more a resultant of the supply side pressure and constraints, higher crude and Agri prices and not fuelled by the demand-side because of excess liquidity into the system.

Thus, we believe that given the opinion of the experts and also a demand from the industry for this, RBI might consider raising the ceiling and hence making way for the non blue chip India Inc. to

India's Fantastic Four Stocks: Suzlon

2011-03-14T15:34:00.002+05:30

Suzlon is the second of the 4 stocks in my series of India’s Fantastic Four Stocks

It is among the four stocks that are probably most widely held by retail/HNI investors from the days of previous Bull Run in anticipation that they will at least come back to the price at which they have invested in them.

However, I strongly believe that given its extremely weak business model the chances of Suzlon coming back to its 2007 high of around Rs. 470 and rising around 850% is quite remote.

It is perhaps one of the most talked about stocks across all the business news channels and there exists a support and resistance theory at every Rs 5-10 level just trapping investors at every fall and compelling them to average more and more. Moreover, a lot of institutions, fund managers and analysts rate the company as one of the Gen-X stocks in the sunshine sector and thus trapping the investors even further with the glittering story.

Why Suzlon is a Fantastic Stock?

Despite being in the SUNSHINE wind energy segment its standalone net sales has fallen from something around Rs. 7000 crs in FY08 to Rs. 3500 crs in FY10
PAT has fallen form a level of around Rs. 1200 crs to a LOSS of around Rs. 1400 crs
The reason for this fall in sales coupled with even more fall in profits is the faulty blades which Suzlon produces and moreover spends huge sums to repair the same.

[A very interesting Google search with the key words “Suzlon, Blade and Problems” will highlight the core problem in Suzlon’s business and reason for its continuous stream of losses and poor performance]

Total Debt has increased from around Rs. 9000 crs in to around Rs. 13,000 crs in order to execute expense acquisitions of international subsidiaries and paying hefty goodwill
Total Goodwill in FY10 has increased to a level of around Rs. 6100 crs from the levels of Rs. 1400 crs in FY08, in fact there has being no addition in its gross block for plant and machinery, a capital intensive company is actually not adding real capital
For FY10 for Suzlon around 100% of its Networth is Goodwill, so its tangible Networth is actually negative
Current Higher interest rate scenario in India would hurt the margins further and added to already existing losses
Its corporate governance policies given even more reason for an investor to disown this stock because in the past it has announced series of rights issues, QIPs, other equity raising instruments, precisely at the times its stock price had taken a major hit because of a bad market conditions
A negative trailing 4Q EPS of Rs. (8.15) gives the stock a meaning less P/E and hence no compassion could be made for its valuations

To summarize I would say that Suzlon is like a fancy stock in a fancy industry which is just playing with the investors and continuously eroding their wealth. It’s better to avoid such a stock since market offers far better investment opportunities at the current levels rather than buying or even continuing to hold Suzlon.

In this Fantastic Four series you already know the first two i.e. DLF and Suzlon. The other 2 members of this team of Fantastic Four will follow soon…

Happy Investing…!!!

Union Budget 2011 Expectations...

2011-02-26T14:17:00.002+05:30

Dear All...

Hope you are doing fine.

As mentioned in our credit policy report and also the China housing report, markets have being on a downward slide with some of the stocks being completely battered.

The last hope for the markets as the experts believe is the crucial 5150-5200 levels of Nifty, which if it breaks could lead to a possible blood bath. The event on Monday, the Union Budget for 2011-12 could be the last fight back from the markets to gain its pride.

Please use this link find our report on the key street budget expectations form the market and their possible impact on individual stocks/sectors.

Happy Investing...!!!

India's Fantastic Four Stocks: DLF

2011-02-08T10:18:00.003+05:30

These four stocks are probably most widely held by retail/HNI investors from the days of previous Bull Run in anticipation that they will at least come back to the price at which they have invested in them. However, I strongly believe that given their extremely weak fundamentals the chances of them coming back to their 2007 highs are quite remote and market offers better investment opportunity than holding on to these Fantastic Fours (pun intended).

They also suffer a phenomenon called BASE EFFECT. DLF was around Rs. 1000 in January 2008 and now is at Rs 225, thus it’s a fall of around 77.5% in value. However, if I assume DLF to go back to the levels of Rs. 1000, then it has to rise by over 350% and given its fundamentals and valuations the chances of DLF rising by over 350% even in 3-4 years time frame is quite remote.

Moreover, these four stocks are most talked about 90% of analysts on all TV Channels and there exists a support and resistance theory at every Rs 20-30 just trapping investors at every fall and compelling them to average more and more.

DLF is the first of the 4 stocks in my series of India’s Fantastic Four Stocks.

Why DLF is a Fantastic Stock?

· Consolidated Sales have fallen from around Rs 14,500 crores in FY08 to Rs 7500 crores in FY10

· PAT has fallen from around Rs. 7,800 crs in FY08 to Rs. 1800 crs in FY10

· Despite Rs 7500 crs of Sales and Rs 1800 crs of PAT there has being a net cash outflow of Rs. 260 crores in FY10

· Total Debt has increased from Rs. 12000 crs to Rs. 21,000 crs

· Total Share Capital has increased from around Rs. 1300 crs in FY08 to Rs. 6300 crs in FY10 despite an IPO in FY2008

o Rs. 5000 crs of new share capital have being given to preference share holders thus, further reducing the rights of common equity holders

o Investments have gone up from Rs 900 crs to Rs 5000 crs of which around Rs 4000 crores is invested in money market and other mutual funds

o Loans and advances to subsidiaries and associates have increased substantially

· A BUY back announced in falling markets @ the price of Rs.500/share in falling markets to support the stock price followed by a QIP 3-4 months later

· Over 215 subsidiaries spread across India and high number of inter company transactions (including capital and borrowings) and a regional auditor

· Stock Price Down from over Rs 1000/share in January 2008, to current levels of Rs 225/share and even below its IPO price

· A sluggish real estate market in India both in terms of pricing and volume

· Higher interest rates would hurt the margins further and also impact the real estate demand in India

· A trailing twelve months P/E of around 23 with sluggish growth and increasing debt

In this Fantastic Four series you already know the first one i.e. DLF. Check out this space regularly to know the other 3 members of this team of Fantastic Four.

Happy Investing...!!!

China: Tax on Purchase of Second Home

2011-01-28T11:24:00.003+05:30

In order to cool the over heated Chinese economy in general and property prices in specific the Chinese Government has levied a property tax applicable to local residents for the purchase of a second home or more, and also non‐local residents for any new home purchase, starting with the cities of Chongqing and Shanghai.

The tax structure in Chongqing for homes with selling price 2‐3 times higher than the city average, the tax rate will be 0.5% and will increase to 1% for homes with price between 3‐4 times the city average, and further to 1.2% for homes with price above 4 times the city average.

The taxable value will initially be based on the purchase price, and may switch to be based on appraisal value in 3‐5 years' time. The property tax will also be applied to existing and newly purchased villas.

This move by the Chinese authorities which may also follow to the other cities in China has a dual implication on the global markets.

On one hand it sells a strong signal that the China is in a desperate situation to control its housing bubble and prevent a US like situation and will introduce further such measures as well as rate hikes in near future to cool down its economy. This could have serious implications for the global commodity and metal markets and could lead to a correction in the shares of Indian metal and mining companies.

On other hand the optimists could take this move as a good long term safeguard for the economy despite having negative short term implications. This would mean that China will not burst like US as a bubble because if this happens then the implications for the global economy could be much severe compared to the US burst. This will send signals to the commodity and real estate speculators in China regarding the government's stance against rising prices and hence would give a breather to the already high Chinese Inflation and hence result in slower rise in the interest rates in China.

Thus, I would take this move as a positive one for the Chinese economy and hence for the global commodity and capital markets.

Happy Investing...!!!

Rate Hike Likely in Q3 RBI Policy

2011-01-07T11:20:00.001+05:30

IMF Yesterday in a statement said that the RBI must increase its key policy rates in order to control inflation which is rising beyond its control. The food price inflation released yesterday was at its year high of around 18.3% and way above RBI’s comfort zone.

Thus I strongly believe that in its Q3 policy review RBI is most likely to increase its key rates to tame the inflation which would be negative for the banking and real estate sector in particular and overall markets in general because of an increase cost of funds.

Moreover, most of the banks are also increasing their deposit rates which will lead to a higher base rate and eventually a higher borrowing costs for India Inc. leading to a hurt in their bottom line.

The rising crude and commodity prices (especially copper) are already hurting the profits which with increase in borrowing costs will make things only worse.

Any new long position in the markets if taken should be after 14^th or 15^th of February to join the budget expectation rally, till then chances of a near term upside remains extremely unlikely, however one can take short positions in Nifty with a stop loss above 6050 with a target of around 5700.

BUY What has NOT Fallen

2010-12-21T14:56:00.003+05:30

After hitting its year highs in November, the markets have corrected by almost 8% with the Mid-Cap index falling over by 10% and above.

The key reasons behind this fall could be:

Concerns regarding sovereign default in Europe
Rising inflation and a tightening monetary condition in China
Corruption charges on government agencies which brings down the attractiveness of India as an investment destination, and
Sell of in the mid-cap space because of SEBI's allegation on many companies for insider trading

A lot of people whom I know including even market participants asked me to suggest them few stocks that were beaten down in the down turn. Then someone also suggested me as to why should you bother about the stocks which have fallen and BUY them just because they are cheap and why not focus on very few stock in the mid-cap space which despite this turmoil have not corrected.

The Idea I am trying to say is that "There is no Smoke Without Fire" there has to be some reason because of which most of the mid-caps had fallen and so why not focus on the good quality ones which stood firm in the sell off or on the ones in which you see absolutely no reason for a sell off, but have still fallen in the markets. Picking the latter one requires more analytical and reasoning skills compared to the former.

So to hunt for some good stocks I took NSE Mid-Cap index as my sample base and out of 100 stocks there are only 10 stocks which have not fallen from there highs of early November and of them some of the really good ones which I believe have a good business, good track record of operational performance and strong management areand should be given a thought are Indraprastha Gas, Glenmark Pharma, Exide Industries, Educomp Solutions and Areva T&D.

Its just like when you go to see a horse race you never bet on the loosing horse but on the winning one and so I believe the same logic should be applied in the Equity Space and the looser should not be chased as they will be the first ones to be hammered in the next leg of mid-cap selling.

Crest Animation... A BUY in the SELL OFF

2010-12-14T10:06:00.002+05:30

I Believe that in the current sell off one of the stocks that investors should consider buying with a long term perspective is Crest Animation Studios at the current market price of around Rs. 69. The key rationale I believe are:

One of the only animation company in India who instead of only being an outsourced animation content provider, also is a partner in the movies it provides animation for

JV with Lions Gate Entertainment of US, one of the biggest production houses for providing animation to their movies and having a profit share in the same

1^st movie Alpha and Omega released in September 2010 and have already done a business of over $40 million and is poised for a world wide release in 2D and 3D space, moreover the movie is in Oscar eligibility list, the 1^st animation movie from India in this category

On an average an animation movie produced by major production houses of US makes around $ 100 mn in profit

I believe Crest’s Alpha and Omega to do 50% below average, which gives a profit of around $50 million

Here Crest’s Share being 25% of profit, gives it a value of around $12.5 million

Which is around INR 56 cr of profit, given total number of shares, comes to EPS of around Rs. 25/share, which it would book over FY11 and FY12 (normal practice in movie industry)

Thus given the current market price of around Rs. 68 gives it a forward P/E of around 5.7 in a high growth animation industry where peers like Prime Focus, Tata Elexsi and DQ Entertainment trade at a P/E of over 20 times their forward earnings

Even taking the worst case scenario of a forward P/E of around 10 (50% below the industry average) the fair price comes to around Rs 150, which is double from the current levels

This EPS expansion or growth will continue because it is slated to release one more movie in tie-up with Lions Gate in 2012 titled “Norms of North” then in 2013 titled “Ribit” and from then on a movie each year

De Shaw holds over 15% of the company and Deutsche Bank holds around 7%

The only risk with the company I see at the current point in time is that its still loss making and the first set of earnings will start coming from the quarter ending March 2011.

Happy Investing...!!!

Some Strange Statistics and Deja vu

2010-10-26T09:52:00.003+05:30

I was going through the morning report published by Kredent Advisors and some very strange numbers I have come across which I would want to highlight. These numbers conflict each other to great extent and does not highlight to true recovery or may be highlights that the recovery is hollow.

Over the year the crude oil prices have risen by 2.93%, however YTD the gas prices have fallen by over 40%. The crude oil and the gas are more of less substitutes and this weird movement in their prices I believe could be because of the reason that crude gets more media attention and hence in order to show to the world that recovery is genuine the crude have being kept at a higher level compared to gas

The Baltic dry index have fallen by over 17% (YTD) whereas the price of copper have risen by over 14% and that of other base metals like zinc or nickel or aluminium have also risen by a decent amount. Now Baltic dry index measures the freight charges that the shipping companies around the world charge to ship dry substance around the globe, the higher the real demand for metals is, the higher are the freight charges and hence the higher Baltic dry index. The reverse movement in to two I believe that could be because of a lower real demand for the metals, however the speculative demand in the futures market resulted in their price rise

Gold and Silver YTD is up by 24% and 44% respectively, whereas the US equities is up by around 6% and the USD is only down by around 4% for the same period. This trio-logy also denies the correlation between the three assets. If the world is so bullish about the equities, with emerging markets like India being up by over 16% ytd, then why are they buying gold. They may say that they are loosing the confidence in the paper money, but then they should sell the USD which is also not down significantly. What has happened that in the first half of the year the gold rose because of EU crisis and people buying gold as a safe heaven and in the second half it rose because of a weakening dollar. Whatever reason they may say to speculate on gold, I believe that GOLD and Equity and Currency can not and will not move in the same direction for longer

With Indian rupee also gaining strength hurting the export oriented sectors, lack luster Q2 earnings perform and no upward revision in Sexsex's FY12 earning by broking houses and on top of that BIG TICKET IPOs and people borrowing DPIDs and buying Coal India IPO application, all highlights the same kind of scenario as in 2008 beginning. So my advice is please be cautious.

It all appears like a Deja vu...!!!

Why Compact Disc will Not be a Multi bagger...?

2010-10-08T09:40:00.002+05:30

Couple of days back I came across a brilliant company. Its one of th biggest animations players in South Asia (claims to be).

Here are some of the key factors which at the face gave me an impression that I have come across yet another multibagger:

A compounding growth rate in profit of over 75% in the last 3 years and that of over 60% in sales
Part of a very fast growing animation content outsourcing segment in India
ROE of whopping 52% and ROCE of around 43%
Almost debt free (D/E of 0.22)
Operating margins have been continuously expanding
Couple of movies lined up to be releases in the next one year one "Eternal Love" based on the story of Taj Mahal and other a foot ball based movie based on Pele, this would further expand the margins and gives revenue visibility
Part of 200 companies list that the FORBES magazine recently came up with, best under a billion dollar companies in Asia and growing further

Over and above all this, available at a throw away valuations. A trailing P/E of only around 1.3 and a Dividend yield of around 3.1%.

This, kind of story is a dream for any fundamental value stock picker, even the likes of Peter Lynch and Buffets of the world would want to look into this kind of company at this cheap a valuations.

However, as an analyst what I have learned over the years from my experience and reading these veterans that whenever something like this sounds too good to be true, there has to some catch (on 8 out of 10 occasions and on remaining 2 you actually find a MULTI BAGGER). So, the catch with this company is its management.

The actions of management is highly susceptible and that is why market is not rewarding the stock.

Over the years despite the company showing such a record growth, the management shareholding has fallen from around 40-45% to around 20%
The shareholding pattern of the company (for June 2010) shows 75% of the shares as being held by the public. My guess is that a large chunk of these are ‘benami’ holdings of insiders who offload shares once the price takes off
That is why the company every now and then comes up with big ticket rumors like acquiring some company in UK, new movie tie ups and later no such action actually takes place
The biggest problem is that the company is promoted by the infamous Seengal group and its one of the Directors Rashmee Seengal also belongs to the same group.
The Seengal group in the past has faced SEBI and also CBI probes for floating several bogus companies and raising money via IPO and announced various projects which never happened to see the light of day. These included an LPG-related business, a hotel company and at least three more ventures.

Thus,the market which now is smart enough to see and realize these things are not giving any premium to the company which at the face of it looks exceedingly brilliant and even though valuations are cheap and business is great. It wold be difficult for the stock to generate any returns.

Happy Investing...!!!

Ayodhya Verdict and Markets

2010-09-28T20:27:00.004+05:30

On Thursday, the Allahbad High court will deliver its judgement in the 60-year old Ramajanambhoomi- Babri Masjid case and I believe even though the verdict will be out after the market hours, there could be an opportunity for traders to capitalize on the outcome.

The verdict, which no one is aware of could be:

In the favor of the the Hindu community or the Muslim community
Or the court might also deliver a kind of a neutral verdict and ask the parties involved to have an out of the court settlement (A dream outcome for most of peace loving people)

I believe that the way markets should react on Friday morning depends precisely on this verdict. If the verdict is in favor of any of the community, then the other will reach or is expected to react violently and thus bringing politically instability to the system and could lead to an sell off in the markets.

However, if its an neutral verdict asking for out of the court settlement (very low probability) then the markets which are expecting a sell off would react positively and should gain higher momentum.

In, either of the scenarios, what is common and is expected on Friday is UNCERTAINTY or high VOLATILITY. Thus, in order to capitalize on this active traders could use options to buy volatility.

The implied volatilities are also quite low and the strategy to buy a straddle (buying an at the money Nifty call and put options, around 6000 levels) or a strangle (buying an 6200 call and a 5800 put) could lead to a decent returns, if markets as expected remains volatility.

Thus, ones who have traded in the options in the past and are aware of the inherent risk in trading in derivatives should go ahead and execute the strategy, however freshers or novice in trading should avoid derivatives.

Happy Trading...!!! (For the first time :D )

YEN Movement Tells a LOT

2010-09-19T10:16:00.003+05:30

One of the major indicators that could help investors/traders understand the direction of the global equity markets is the movement Dollar-Yen Movement.

A currency in general appreciates if the interest rates offered by the government is high compared to the interest rate offered by the government of the counter currency. Moreover, the currencies of the developed nations also appreciate against their developing counterparts because they are more liquid and accepted globally vis-a-vis the developing market currencies which are not highly liquid.

However, the one peculiar character YEN has that it is also regarded as a safe heaven currency. In the time of economic crisis investors want to hold yen as a flight for quality investments. Over the last few months the way YEN has appreciated despite the fact that the currency offers least amount of returns to the investors. The fundamental reason behind this is that the Japanese economy is gripped with negative inflation is also a net creditor to the world, thus its currency is much more stronger and hence at the time of crisis it offers good reasons for capital preservation.

The only thing this suggests the fact that the investors from all over the world (except India) are in a continuous process of booking their profits form all the risky asset classes that has given a tremendous run up over the last 1.5 years and probably parking their investments in YEN.

Moreover, the current one week rally especially in the Indian markets has also gone parallel with a over 2% depreciation in YEN. Thus, I strongly believe that one should keep a strong vigil on the USD-JPY movement and should start booking profits if yen strengthens form here, the level of 85 should act as a good level to act on.

ECB in 2008 = RBI in 2010 ?

2010-07-04T22:42:00.005+05:30

I am sure that the subject of my article would be very confusing for some of you or may be strange for a lot of you. What I am trying to convey with this one is again some graduation level economics which I studied during my Macroeconomics paper in 2005, which I believe the world central bank's heads are forgetting or trying to overlook over more complex understandings.

The core objective of any Central Bank is to do a through analysis of the forthcoming economic situation of an economy (growth and inflation) and accordingly adjust the liquidity flow into the system. It also involves taking into account any major local or global events that could shape up the economic situation in the country and hence being prepared for the same.

Thus, in nut shell I would say that the core objective of any monetary policy is to manage liquidity into the system so that the economy grows (with minimal inflation), but this decision should be based on ex-ante analysis and not ex-post analysis.

This precise mistake I believe ECB committed in July 2008. In July 2008, when the global credit crisis was almost about to reach its peak, the global growth outlook was bleak and most of the central bank's around the world were either growing through rate cuts or on the verge of doing so, ECB announced a rate hike of 25 bps, which as per experts is one of the many important reasons of the current EU turmoils. The move as said by Mr. Trichet was" mainly on account of "heightened concerns at the ECB about inflation in Europe".

The inflation which was just a temporary phenomenon in EU because of the high commodity prices, made ECB think beyond the US Sub-prime and Global credit crisis and took a rate hike decision, saying that "the crisis was one belonging to US and will not have impact on EU". Thus in October when the US crisis started spreading wide the EU was down of out because of the decision in July.

The same is what RBI has done on Friday, going by its ex-post and probably present rate hike analogy has gone ahead with a rate hike. Its done probably at a time when the Indian banking system is already crunched for liquidity because of 3G and BWA auctions, can have a long repercussion. The RBI also said like EU said in 2008 that "Inflation is a bigger concern than EU Crisis".

Thus going further, I strongly believe that if this EU crisis spreads more (which has high chances) Indian economic growth and more importantly the stock indices could see a blood bath.

The Indian markets as of now is quite insulated from the global turmoil, but like EU in 2008 this move by RBI on Friday could lay the foundation for a big Index correction.

July Could be Jittery For the Markets

2010-06-27T00:25:00.003+05:30

The month of July can cause real jitters for the Indian stock market and the party could end. Most of the top economists and market gurus have started saying that the year 2010 could be a mixture of two halves, the first half ending on a positive note and the second half leading to a sell off and a economic downturn.

There are 4 big events in the month of July because of which I believe markets may end lower in the month of July

First which I had already discussed in my previous post is the $30 billion IPO, by the China AG bank, which could suck the liquidity out of the emerging markets and thus leading to a fall

Second in July only, perhaps in the later half of the month the EU will come up with its bank stress test results and without any plan so as to how it would provide any kind of support to the ill banks the results may provide another reason to sell the financials and other related stocks around the world

Third, from 17th July, Nifty futures will be traded on CME and this move is taken in order to facilitate US investors to take exposure in Indian markets without facing the hassles of cross border investing. This, I believe might lead to a liquidity crunched Indian markets

On 27th July, is the RBI Q1 credit policy, with statements from the governor that inflation being the bigger concern than the EU crisis, and the recent fuel price hike, I believe it sets a strong case for the RBI to go for a rate hike (and I think it might come as a surprise well before the actual policy date). The Indian banking system which is already liquidity crunched because of the 3G and BWA auctions could take a serious hit if this happens. The Bank Nifty falling by around 3% on Friday just after the fuel price hike, signals the market expectations of a rate hike.

Thus, I believe that the best one could do in July, is to avoid long position and traders can also use low IVs as a tool to go short using the put options. Moreover, the currently going on G20 meet could again be a damp squib as has being the case in the past and can see some selling on Monday only.

Be Cautious & Happy Investing...!!!

Indian Impact of Chinese Yuan Revaluation

2010-06-21T14:46:00.004+05:30

Facing growing pressure from around the world, The People’s Bank of China announced on Saturday that it is prepared to allow the country's currency to float more freely against the dollar and other foreign currencies. The bank said that “this step is in view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China”

This step by the Chinese government would end the two-year Yuan Peg to Dollar (6.83) and will take the pressure of Beijing at the G20 meet at Toronto next week. It seems that the Chinese will not strongly revalue its currency because the very next day in a follow up statement it ruled out a one-off revaluation and said there were no grounds for a big appreciation of Yuan. However, the revaluation will have a dual impact on Chinese economy

· On one hand it would make the Chinese exports expensive for the world market and will benefit exports from other competing countries like India, Brazil and other South East Asian economies

· On the other it would make imports cheaper for China and will give the government a strong tool to manage its inflation, increase the purchasing power of the people and resulting in more broad based growth and in turn leading to the establishment of service sector in the country

All and all this move by China is good news for the global economy and other developing countries that are unable to compete with China in terms of exports because of its week currency.

Indian Perspective

This will ease India’s trade deficit with China and will help Indian exports of textiles, leather products, marine products, engineering products, auto ancillaries more favorable in comparison to the Chinese exports.

The trade between India and China soars closer to the US$60 billion target, India’s trade deficit with China is increasing. In 2009, India suffered a trade deficit of US$15.8 billion against China, while in 2008 the trade deficit was 11.17 billion., thus a stronger Yuan will help in eliminating this deficit and also increase the cost of Chinese imports of electrical machinery and other goods into India and benefit Indian manufactures.

For Impact on Individual sectors/stocks that would benefit with this Chinese step, please use the following link to download our report on the same.

European Debt Crisis: Snow Ball Effect

2010-06-17T23:29:00.004+05:30

The phrase Snow Ball effect draws its analogy with the rolling of a small snow ball down a snow-covered hillside. As it rolls the ball will pick up more snow, gaining more mass and surface area, and picking up even more snow and momentum as it rolls along.

This is precisely what is happening with the European financial crisis. Starting from an initial state of small significance it is building upon itself, becoming larger (graver, more serious), and perhaps potentially dangerous or disastrous for the global financial markets.

The problem is that the Debt to GDP ratio (D/Y) in most of the EU countries is far higher than, those mandated by the ECB's guidelines. The biggest task with the EU nations currently is to reduce this D/Y as much as they can in the coming years in order to avoid a mess. The Two ways in which this can be reduced are

Rising Nominal GDP (which would lead to a fall in denominator Y)
A falling Nominal interest rate, which would lead to a fall in the current expenses on interest and hence the deficit (The numerator D)

But what is happening in the EU zone currently, is that everyday when the government of these debt ridden countries are coming to the bond markets for an auction are paying higher and higher yield to sell those bonds (which means higher nominal interest rates) and also the budget cuts/ new taxes levied on the people will lead to a fall in the GDP growth rate. Thus, creating by what I mean a snow ball effect.

Its being said by the noted economists that A "1%-decrease in average funding costs from 2010 results in a 5-17%-point lower debt-to-GDP ratio in 2020". But the funding cost is continuously on an up trend, creating a risk of contagion (crisis spreading from one country to other).

Thus, the investors who are demanding higher yield to buy those EU countries bond because of a higher risk, need to understand that the higher yield they command the tougher it would be for these countries to pay back their debt in future because it will create a snow ball effect and make it virtually impossible for them to pay them back.

I hope some one from EU understand simple graduate level economics read this blog or.. :D

China in Stagflation...?

2010-06-15T09:36:00.004+05:30

In Economics the term stagflation refers to a situation where the inflation rate is rising along with a fall in output levels.

Many eminent economists believe that In China, this could be a possible situation shaping up. Some of the most recent facts that highlight the same are:

On Friday the Chinese government released the figures for CPI and IIP. On one hand the CPI figure for the month of May was at 3.1%, above the street expectations and on the other the IIP number for May was below the street expectations at 16.5%.

The Other Indicator which points out that the Chinese economy has already peaked is the OECD's composite lead indicator. (For More Details you can use this LINK to download our report on the same)

The Chinese government over the last week did not receive enough bids for any of its bond auctions to be fully subscribed. The reason attributed by the investors is the rising inflation concern in China and low yield offered by these bonds

Last week, the Steel prices in 30 of China's major province has declined for the 7 straight week

According to China's Commerce Ministry, the debt problems in the EU will impact Chinese exports in the coming months. The ministry said that it t typically takes Chinese companies about 2 months to fulfill orders, so May's shipments reflected order books before the EU crisis deepened

The only positive news that came out lat week form the China front was that its exports figures grew by a whooping around 50%,

Kredent Analysis:

Thus we strongly believe that the macro economics events shaping up in

China

is a cause of concern for the global economic recovery and specially for the metal and mining space. Thus we would advise investors to remain cautious as the Nifty Index again reaches the levels form which it had retraced in the Past.

This could EVAPORATE Liquidity From Markets...

2010-06-11T09:40:00.003+05:30

Yesterday the ECB announced the key rates and as the streets expected, they were unchanged.

There was no positive out of the press conference from Trichet, the only thing he did was subtly pleading to the world that "EURO is a stable currency' and reiterated again the same things that the ECB would leave no stone unturned to save the real economy. This lead to a over 200 points rally in Dow Jones and more than an 1.5% gain in Euro. I believe that its more of a short covering bounce back and the only direction the Euro is headed is southwards.

I expected July to be a calm month for the markets, and the biggest reason is that the China AG Bank is coming up with the world's biggest IPO of all time. On July 16th its coming up with an IPO of $30 billion and this could really suck huge liquidity from the markets even if it is just fully subscribed. One should wonder what if, the issue gets oversubscribed by two times and three times. It could evaporate the liquidity of the size of two times Reliance Industries total market capitalization which is around Rs 3 lakh crores.

In history too IPOs of high magnitude from good companies have lead to a dearth of liquidity in the Secondary Markets and this time also I expect the same. AgBank, whose 350 million customer base is bigger than the population of the United States, had $US7.1 trillion in assets as of 2008, its last public financial filing, is a bank which even the institution would love to own and hence the liquidity could dry up.

Hence a good trading strategy for Traders could be to establish position in put options in Nifty expiring in the month of July, as the VIX has also come down significantly. For Investors the best is to stay out of any extravagant short term positions and continue their SIP.

Happy Investing...!!!

Sugar becomes Sugar FREE...

2010-06-10T09:52:00.003+05:30

The stocks in the Indian sugar sector which had given a strong run up last year owing to a shortage in the supply of sugar is showing the signs of weakness and is expected to do so.

Last year because of a bad monsoon, a fall in the supply from the Brazilian front and production surging, fortunes of the sugar industry changed dramatically. For some of the companies there market cap surged by over twice the debt on their books and it was a complete change in the capital structure, of the whole industry.

However, Sugar companies, which were expected to make bumper profits because of soaring sugar prices — Rs 41.15 per kg in January 2010 — are now facing the heat because of the peaking of the sugar cycle. Ever since scaling a peak in January, prices have corrected by almost 33.5 per cent to Rs 28 per kg. This is also one of the reasons why most sugar companies have seen a sharp decline in their share prices.

Sugar prices have corrected globally and in the domestic market. This is consequent to expectations of the global sugar industry moving from a deficit to a surplus situation. According to the International Sugar Organisation (ISO), the world sugar market, which was estimated to see a deficit of about 8.51 million tonnes for sugar season (October to September) 2009-10, could see surplus stocks of 2.5 million tonnes in the forthcoming season in 2010-11. This however is not something surprising. The Indian and the global sugar industry goes through this phase almost after every 5-7 years.

With the Rise in sugar prices, the demand from the mill owners for the cane increases
This leads to most of the farmers shifting to sugar form their current crop production to realize higher cane prizes
As more and more farmers enter into cane production, the cane supply increases
leading to a rise in the sugar supply and hence fall in the prices and then the reverse cycle starts, which is currently beginning to happen in the Indian Sugar Industry

Moreover, the profitability of the companies will also get hit on account of inventory losses both in the case of raw material and on the finishes sugar front. The industry is lobbying for a levy on the imported sugar to have a check on the imported sugar into the country and if this happens could give a little breather to the companies, otherwise its one sector which one, as an investor should avoid.

Happy Investing...!!!

Is the EU Bailout Package Enough...?

2010-05-11T09:57:00.002+05:30

Yet again the global financial markets yesterday cheered the fact that an ailing patient (EU) has being given a strong financial medicine. All the major Indices around the world were up by almost 4% on an average on account of this strong step by the EU members. A bailout package worth almost $1 trillion.

But the question is,

Is this something to get overexcited and start buying stocks ?
Is this bailout package enough to give a stability to the European financial system?

Well, the answer to the first question is NO. This is not something to get overexcited and start buying stocks. Most of the rally that happened yesterday was a short covering one and any market data do not point towards any kind of a fresh buying.

The answer to the second question is that YES it has partially given stability to the global financial system, especially EU, a short term stability. The medium and the long term risks still remain. This is clear by the fact that

The yield on the Greece's and other crisis ridden EU nations two year bond fell by a hefty amount (For Greece it almost halved), however the yield on the 10 year saw only a minor correction
The difference between the LIBOR and the overnight indexed swap rate, the so-called Libor-OIS spread that rises as a signal banks are less willing to lend, climbed yesterday even after the rescue announcement

Thus, I strongly believe that the outlook has just improved for a very near term and there are record deficits in just about every country EU and something ultimately needs to be done about them. The current measures is just to stop a complete vertical fall and to prevent it making it look like a bubble burst. However, the slide should continue.

Moreover, what it has done is integrating a political union from an economic union, whereas the case is always the opposite around the world. Hence, if the countries getting aid do not comply to the will of the political bosses (Germany & France), could lead to an altogether different crisis.

Hence, one should use this momentum lead rally only for trading that too with strict stop loss since, nothing too good has happened.

Contradictory Economics in US..

2010-05-05T14:47:00.004+05:30

Ever heard of an Economy where the unemployment rate is continuously rising, but along side the overall automobile sales, retail sales, sales of expensive luxury goods is also rising along along side.

No, not heard of...?

Some of you might be thinking that its practically impossible, since if unemployment level is rising, then in a scenario like this how can the population afford all these luxuries.

But, in reality its TRUE.. Welcome to the biggest economy of the world, yes the United States of America.

This is precisely the case happening in US over the last one year period or so. What is happening is that the stimulus plan in America is letting so many of its people live "rent free" as they sit in defaulted homes not making a mortgage payment. This savings form not paying the rent allows them to shop and spend, and support the falling consumption driven American society.

Even the home foreclosures are on a rise, hence despite the foreclosures on a roll and the rising unemployment the people are striving in consumption based on Credit Cards and Auto Loans. So, the because of the government stimulus, the already indebted American Economy is consuming more by taking more and more loan.

People are not paying their mortgages because the Government is doing this-- as much as 15% of them are in trouble or just being defaulted on -- but they are keeping the cards and keeping the cars so that they can go out, lead their lives and shop like the old day.

So, once the Government starts withdrawing the stimulus package, the way Indian or Chinese or Australian government has done, the consumption, which is the back bone of US economy will break and the recession will loom again.

Hence, I would say that the fundamentals are not as good as it looks, especially in the developed world. The crisis as I had mentioned earlier has started to mount of other European nations and the markets have started to show signs of weakness.

So, remain cautious and invest in defensives. One such defensive stocks we are currently working on is Novartis. I will come up soon with a report on the same.

Happy Investing...

Alexander would be Crying in his Grave...!!!

2010-04-30T12:15:00.002+05:30

You must be wondering why am I mentioning about Alexander the Great in a finance blog. However, I believe that whatever is going on with Greece currently, the title of my blog is not inappropriate.

Since, Tuesday when the Sovereign rating of Greece was cut down to JUNK status, the whole world is wondering whether or not Greece will get any bailout or will default. The Greek bonds are currently yielding around 22% and this makes me happy, that India despite being an developing nation is yielding only around 8%. (Since all the text books are proved wrong which says that a developing country like India will always yield more than a developed economy).

The only possible thing that could save Greece from restructuring its debt (which is equivalent of a default) and bring some cheers to Alexander the Great is a bailout package. However, the biggest road block to this bailout package is the European super power Germany. The German public opinion is firmly set against dipping into the tax payers wallet to help the Greece. Thus the German Government is in a tight spot:

On one hand it can agree to extend the aid to Greece and face a voters backlash and send its party to a crashing defeat in the regional elections in Germany on May 9th

Or on the other just sit back and and let the Greeks default and trigger this credit problem into other larger debt burdened EU members.
This would also lead to a problem for different private sector banks in EU area who currently holds Greek Bonds and this would lead to another crisis of its kind

However, if you believe conspiracy theory, what I see that the one of the key beneficiary of this whole Greece episode is Germany. What has this Greece problem done, is that it has substantially weakened the EURO and Germany whose major portion of GDP is export dependent is benefiting highly from this and in order to bring down the Chinese dominance the Germany is deliberately postponing the bailout, so that it can prosper in the export market.

Hence, I see no clear direction for markets at lease before 19th when Greece has to either fund its debt obligations from the bailout money (if it gets) of default. I had highlighted the kind of possible threat EURO area is to the world markets over a year back, you can use the link to re confirm. So, I would again say that the things are not as good as it looks like. Nifty has a major resistance around 5330-50 and any new long trading positions should be taken only once this hurdle is crossed.

Till then keep doing SIP in the stocks I had already discussed in my earlier posts.

Happy Investing...!!!

25 bps or 50 bps...?

2010-04-20T10:17:00.003+05:30

The Reserve Bank of India yesterday released its review of the macroeconomic and monetary developments which serves as a background to the Annual review of Monetary Policy 2009-10 being announced today, April 20^th, 2010. The crucial question is whether the rate hike will be of 25 bps or of 50 bps.

Some of the Key Highlights of the documents which we believe will set the tone of the monetary policy are:

· While recovery in private demand needs to be stronger to reinforce the growth momentum, already elevated headline inflation suggests that the weight of policy balance may have to shift to containing inflation, since high inflation itself will dampen recovery in growth

· In the emerging macroeconomic scenario, monetary policy management in 2010-11 will be dominated by the challenge of moderating inflation and anchoring inflation expectations, while remaining supportive of growth impulses

· Concerns about domestic output growth are now subdued as the recovery is getting more broad-based. This is the result of a rebound in industrial output, better prospects for the Rabi crop and continuing resilience of the services sector

· The fiscal exit, as planned in the Union Budget for 2010-11, would contribute to improving the overall medium-term growth outlook, even as going forward, greater emphasis on quality of fiscal adjustment would be necessary

· Net capital inflows can be expected to increase further during the current year reflecting the prospects of higher growth and larger interest rate differentials between India and the advanced economies. Like other EMEs, however, higher capital inflows could influence asset prices, domestic liquidity conditions and the exchange rate. This will have implications for monetary management

· Going forward, the demand for money may increase with acceleration in recovery and the elevated level of inflation

· The initial inflationary pressure was predominantly conditioned by rising food and fuel prices, reflecting the impact of a deficient monsoon on agricultural output and the increase in international crude prices. In the second half of the year, with persistent supply side pressures, inflation became increasingly generalized

· The inflationary conditions, coupled with the stronger momentum seen in the pace of economic recovery, created the compelling ground for altering the Reserve Bank’s policy focus to anchoring inflation expectations

· Reserve Bank’s Survey of Professional Forecasters suggests (median) growth for 2010-11 at about 8.2 per cent

· Inflation can be expected to moderate over the next few months, from the peak levels seen in recent months. There are, however, upside risks to inflation:

o International commodity prices, particularly oil, have started to increase again. In several commodities, the import option for India to contain domestic inflation is limited, because of higher international prices

o It is important to guard against the risk of hardening of inflation expectations conditioned by near double digit headline WPI inflation.

Analysis:

The trade off between managing inflation expectations and still keeping India on the growth path is costly since the capital markets are moving way beyond the real economy. Still, we do expect a rate hike in the annual review of monetary policy due to a over emphasis by the RBI on the inflation front in the macroeconomic and monetary review document.

The street has already started to factored in a repo and reverse repo rate hike of around 25bps, however the central bank may give a negative surprise by taking this number to around 50bps also.

The way Nifty has behaved over the last 4 trading sessions clearly suggests that markets are factoring in a change in RBI’s stance. Thus we strongly believe that its time in the market to remain cautious and move away from the rate sensitive like banking, infrastructure and real estate and move towards defensives.

Happy Investing...!!!

Goldman's Deeds: Fraud or Innovation...?

2010-04-19T08:50:00.002+05:30

Before Friday Goldman Sachs was one of the most highly regarded financial services firm in the world, the only Investment bank that dis not crumbled during the sub prime crisis and not to have shown losses in any of the quarters since years.

But the things changed after Friday, when SEC filed the lawsuit against the firm for creating one of the most innovative financial transactions called Abacus, that allowed Goldman to off-load the risk of mostly subprime home loans and commercial mortgages to investors, either as hedges for similar positions or to bet against securities itself.

In, a simple lay man term what Goldman did was to sell mortgage bonds to investors which it was sure will default and hence also purchased default swaps that offered payouts to Goldman Sachs if certain mortgage bonds didn't pay as promised, in return for regular premiums.

So, what happened that during the crisis time when the bonds sold to investors started under performing and investors lost billions of dollars, Goldman Sachs minted those dollars as a pay off for the bond's default.

This, as per SEC is a clear case of breach of investors trust and hence a law suit and the company's stock tumbled over 15% on Friday and the negative sentiments spread across the globe and the markets melted.

Hence, I would advice all to remain cautious in the markets since this news could have far wide repercussion and moreover it is certain that the RBI would hike the interest rates tomorrow. Its the time to start going for the defensives and move away from high momentum.

Happy Investing...!!!