Every week I feel the market has peaked. And every week it goes a little bit higher. The trend is consciously up, and the market is trying to work through the strong upside resistance at 5400. The weekly graph shows serious volume, and an MACD line that wants to go above zero. (the MACD Line above zero is a bullish indicator)

With the resistance at 5400 – because of earlier stops around here, there will be some back and forth. But every single day you watch bears get slaughtered with strong intraday moves up just when the market attempts to go lower. This is not a sign that there is no selling – but that the sellers are buying back almost immediately because they're getting so badly burnt.

When the last bear disappears, this rally is over. The sentiment remains negative, so we’re unlikely to break down too much. (Disclaimer: Long – and using long dated puts for shorts)

India’s Index of Industrial Production (IIP) for December has been released. The index is up 1.8% over last year.

This should end a dismal year in for manufacturing, and we might see activity pick up in Jan. This data, though, is horrendously unreliable, and revisions come often. The IIP for December, given the dismal financial results, should have been even lower and I suppose it will be corrected soon.

In a different way, use based indexes give us a picture:

All the positive action is in Consumer goods and non-durables.

Today’s chart is the huge move in the INR – largely on the back of RBI selling dollars, and some FII money returning.

The 200 DMA is at 47.74 and will likely be the support for the dollar.

The move has been sharp – nearly 10% in about two months!

The recent issue of tax-free bonds – that is, the interest is tax free – by the National Highways Authority of India (NHAI) has listed on the NSE. There are two bonds – a 10 yr at 8.2% and a 15 yr at 8.3%. You can also buy these bonds now, if you have a broker. (The codes are NHAI-N1 and NHAI-N2)

Note: Please read the excellent comments by Anon. The interest rate is a weird beast which I've had to use XIRR to calculate.

Since the interest is paid once a year on Oct 1, every passing day accumulates interest inside the bond, so the price keeps going up. The bonds are Rs. 1000 each, so if the yield remains the same, they will go from Rs. 1000 on Oct 1 all the way to Rs. 1082 (on the 10 yr) on Oct 1 the subsequent year. (Actually it will be till Sep 16, which is the record date, but I'm not going there!). Interest will be paid and the bond price will fall by that amount (Rs. 82 in this case).

Here’s a sheet that shows you updated calculations based on current prices:

I’ve included the yield calculation for the 30% and 20% brackets (I doubt the 10%’ers will care)

The listing has been good, at 1032 / 1041, which is about 3% higher. That’s not great by equity standards , but for bonds it’s a nice deal. Let’s wait for the three others (PFC, IRFC and HUDCO) to list as well.

(Bookmark this page – it will update prices automatically, you can come back next month to check, if you like)

The Nifty Earnings Per Share (EPS) Growth – as revealed by the National Stock Exchange – is slowing.

We are again diverging from the P/E which has now crossed 19.

If you think that looking at one year is bad, then let’s see longer terms. EPS Growth of the Nifty, annualized for:

1 year: 7.37%

2 years: 9.5%

3 years: 10.0%

4 years: 4.6%

5 years: 6.2%

7 years: 10.0%

These are not figures that warrant a 19 P/E, to be honest. Don’t get me wrong, 10% or 8% are good growth rates. But when you pay a P/E of 15-21, you would expect more, one thinks.

I’ve had two questions on email recently about Dynamic bond funds.

The concept of Dynamic bond funds needs an understanding that bonds are complicated, way more than stocks. A few things that make bonds different:

a) Issuer creditworthiness: Is a government bond more likely to default, or a second rate corporate bond? Would a Reliance bond have a chance of default more than say an ICICI Bank bond? The lower the credibility the higher the interest rate one asks for.

b) Yield: How much interest will I get, on a comparative basis, for this bond versus that one?

c) Time to maturity: A lesser time to maturity usually means a lower interest rate, since the haziness about whether an issuer is creditworthy (or will not default) is lower in the short term.

d) Smaller things like “is this bond secured against the company’s assets?”, “is this bond liquid?” etc.

Dynamic bond funds are essentially those that vary the above based on the fund manager’s discretion. Usually the fund manager will go into shorter term securities in a rising interest rate cycle, or move from corporate to government bonds at a time when the economy is slowing, and so on.

Now to the questions:

What’s the difference between a Gilt Mutual Fund and Dynamic bond funds?

A Gilt fund invests in Government securities only. Within Gilt funds you have further classifications: “short term” gilt funds that invest in T-Bills (<365 days) or in 1 to 3 year govt securities. Or “long term gilt funds” that hit the higher terms.

Dynamic bond funds are supersets; they can choose to invest in gilts or in corporate bonds or commercial paper, or all of the above.

Second Q:

I typically purchase funds with valueresearch rating of 4 or 5. Hence, I have selected and started investment (redirecting new investments for fixed income and proceeds from redemption of ultra-short schemes) in L&T Flexi Debt fund - Growth (VR 5 star fund). Now I am looking at diversifying by investing in another fund of similar philosophy. I was evaluating Birla Sun Dynamic Bond, SBI Dynamic Bond, BNP Paribas Dynamic Bond (erstwhile Fortis Flexi Debt), Kotak Flexi-Debt (which is surprisingly classified in ultra-short term in VR, I think due to maturity of currently held portfolio) but could not reach a conclusion.

Can you please suggest approach for identifying such a fund? Also, can you please suggest some good ones (from them or apart from these)?

Now I don’t invest in dynamic bond funds, but I would use the following rules:

- The fund has to be at least five years old, or you should really trust the fund manager.

- Check the performance in a rising interest rate cycle, and a dropping one. For the record, here if the interest rate history in India:

- Here’s where you really need time and effort: During the periods of falling rates, you will need to go back, download the fund’s disclosure statement and see if the average maturity of their portfolio went UP or DOWN, and whether you liked their move into/out of government bonds.

- Check relative performance with other fund categories (like gilt funds, income funds or other such).

- Make sure exit loads aren’t onerous.

- Lastly, understand that the product carries risk. Bonds are not risk free.

If you can’t do the analysis, get your advisor to provide you with it. (And pay him; tell him you’ll buy the product online) If you can’t do that also, don’t buy the product. A fixed deposit at a bank also works.

Dynamic bond funds basically are like that Indian Software company that says, “Boss we do Windows, Java, Web, C++, Linux, Android, iPhone and Nokia coding, any language, any platform, anything”. There are very few companies that have successfully done all of them, so you have to analyse past performance and be able to trust the fund manager.

While I’d like to analyse the funds, I think it’s better if I let each interested person do it himself – the exercise itself provides the learning. Also because I can’t afford the time, but that’s a different matter!

Tamal Bandyopadhyay has a great article on the growing NPA situation in banks. While many public sector lender NPAs have gone up, the NPAs in private banks have fallen. This could

Some banks are looking for an easy way out to tackle the problem—loan restructuring—but this can only delay the inevitable. In 2009, after an unprecedented global credit crunch, RBI had asked banks to recast loans across sectors where borrowers were under stress. Roughly about 5% of loans were restructured at that time.

Many of the restructured loans have started turning bad. That’s not good news. But what is more worrying is that banks have been looking for restructuring loans given to troubled sectors and firms and asking for special dispensation from the regulator so that they do not need to set aside money for such restructured loans, which otherwise would have turned bad.

In May, RBI tightened the provisioning requirements on certain categories of NPAs and restructured loans, but that’s not enough. Indeed, restructuring of any loan should be left to the banks’ commercial judgement and if they find that a moratorium on loan repayment or a cut in interest rate could help a borrower repay their money they should be allowed to do so, but banks must set aside money even for such restructured loans till they turn good. Otherwise, restructuring of loans will simply be a mechanism to bring down NPAs.

Essentially, if you restructure a loan, you needn’t reserve much for it (other than 2% – that 2% is chump change). Banks, in the case of Air India, didn’t even want to put in that 2%, which tells you how incredibly levered the system is!

Concept: If I can’t pay back a loan – interest or principal – for three months, I’m a “bad asset” for a bank. But if I say that listen, give me a year, and I’ll start paying back everything, even if you charge me a higher interest rate, then I’m a “restructured asset”. This is how it works in theory. When too many loans go bad, the bank is scared of calling them all bad assets, so they “restructure” even if they know that the loan won’t turn good after a while. The thought is to move the problem to later – not very different from the way it was done in the subprime crisis in the US.

Tamal has it right – when a bank’s loan book grows fast, but the proportion of bad assets falls, and there is an economic slowdown of some sort in India, it all fails the smell test. 

The Subrata Roy led Sahara group, in a press release, has decided to sever all ties with the BCCI, India’s leading private cricket management body. They will no longer be the Indian team sponsor and will give up the IPL Team (Pune) that they had recently bought. The official reasons are that they have been sidelined in decision making, that rules were twisted to other IPL teams’ benefit, that they didn’t get a lot of what they asked for and considered fair, and that BCCI is getting to be quite arrogant and biased.

That might all be true, and this might indeed be posturing to try and get the BCCI a notch down.

But there’s another story behind the scenes. On Jan 20, 2012, the Supreme Court ordered Sahara to either give a bank guarantee or mark “unencumbered, sequestered immovable property” under attachment of the court. A SEBI order found Sahara in violation of the securities laws, and they had recommended the return of all the money taken as “optionally convertible debentures”. According to some articles, the money involved could be as high as 17,000 cr. Much of this has been pushed into real estate, but the situation there is murky – some of the properties are mortgaged elsewhere, some others only include development rights (not land ownership) and so on. The “unencumbered” piece of the SC order means Sahara needs to find real money. The supreme court has given Sahara three weeks.

Now three weeks from Jan 20 is Feb 10, 2012 – the coming friday. The exit-from-cricket announcement does free some cash, and the timing is very convenient. Just saying.

Gold Returns have been wayward over the last 40 years, and I present to you, as the Chart of the Day/Week, Gold Price History in India since 1971. (Source: RBI)

And rolling returns on Gold Investments.

You’ll see that Gold, if it’s a cycle, is on the upper end of it. 1 year returns are now over 30% (this is really good for my childrens’ education fund, thank you) and even teh 10 year rolling return is close to the highs of the early 80s.

Note that before 1970, the gold price was pegged to the dollar, so the Indian rupee variant was simply a function of the dollar-rupee exchange rate.

Earlier, gold imports were controlled so till 2000 or so, the Mumbai price was 20-30% higher than international prices appropriately converted.

(Inspiration for this post: The rodinhoods post)

The Supreme Court has cancelled 122 licenses issued by then telecom minister A Raja to telecom companies, saying that they were granted in an arbitrary and unconstitutional manner. Raja had, in 2008, granted spectrum licenses to many companies at a price of Rs. 9,000 cr. which was strangely much lower than the 3G auctions which fetched 69,000 cr for a much smaller number of licenses. Some of these companies turned around and sold stake to foreign companies at a much much higher valuation, meaning that the spectrum had been underpriced, and the process was manipulated so that other parties don’t bid.

The losers are Uninor (Unitech + Norway’s Telenor), Loop Tele, Sistema Shyam (Shyam Tele + Sistema), Etisalat DB (Swan tele + Dubai’s Etisalat), S-Tel, Videocon, the Tata Docomo piece and (some) Idea.

Of the newer players, the bulk of the subscribers are with Uninor.

These guys, as a whole, don’t have a lot of subscribers. Only 66 million (6.6 crore) out of total of 89.3 crore subscribers are with the new fellows – though honestly I don’t have bifurcated figures of Tata Docomo versus Tata’s other services.

These licenses will be auctioned. We don’t know when, how or how much. The court has said four months – within which time the current licensees can continue to operate.

My Notes

• The govt must be thanking their stars – an auction means money for financing what seems to be a horrendous fiscal deficit. If so, they’ll auction the spectrum before March (or if not, it’s something worthwhile next year).
• There’s a large ecosystem that the licensees had created – from hiring people to buying equipment to taking debt to working with partners like call centers and data providers. This ecosystem will suffer, or at least stay in limbo.
• Banks have talked a little about their exposure, which they say is not significant. But I don’t think they currently have an idea of how much they are exposed to. The domino effects will ensure there are bits of bad news on a regular basis in the next few months.
• The uncertainty may cause certain users to attempt to move, but I honestly doubt that’s an issue. If you were a Uninor prepaid subscriber, you might not explicitly move, you’ll just let your currency expire and buy another sim from someone else.
• Most of these subscriber numbers are overreported anyway. Do you really believe, honestly, that India has 89 crore mobile connections currently active? Of a population of 120 crore, where a good number are non mobile wielding children, others live in areas too remote for cellphone coverage, and only a tiny percentage has more than one mobile?
• Is this good for Airtel or Idea? Well, to be honest, when there are auctions, there will be more players coming in and they will have the supreme court sanction that their entry is clean. Airtel has a murky past as well, when they got spectrum in a non-auction method – if someone goes to court, even that spectrum may be deemed to have been underpriced and may go to auction. There is no clarity; and the guys that are “clean” will have a slight advantage. I don’t think the advantage is so much, even if it’s temporary.
• This is not really about auctions versus first come first serve. That would be too silly. The point is that there were bribes given to subvert the specific process that was used to get spectrum, by the parties involved. So they suffer. It is entirely likely that earlier granted spectrum was also mired in bribery, and if that is found, then those licenses will also be cancelled. The court has made it fairly clear that it is this particular case that is a bother, and that will explain why their action seems so harsh.

Even then, the Airtel stock is up big, and the Unitech stock is down big. But after much analysis the issue will throw up news over a regular period, and will cause some level of uncertainty about investing in India. However, it is a good step that will strengthen the process of handing out lucrative pieces of what is public property.

I would like to also see such a transparent auction process on media advertisements by the government (for tenders, or regular ads of performance, or notices). Also for mines, for iron ore, for coal. This will stifle industry for a while, but we can handle it. The auction-versus-FCFS argument does hold water, especially in the context of a transparency act like an RTI.