wither markets

Let's look at what's the problem with the markets. Nifty went to about 5650 and bounced back today. I think this is just a small bounce. Nifty is headed towards 5500 before it decides which way to go.

In fact, I heard a nice joke the other day. Somebody said that Nifty has made a Ghazini pattern. It forgets where it is going after every fifteen minutes.

There is a lot of bad news for the Nifty to do anything good. Inflation is still very high and we have negative real interest rates in Indian markets. Most of our friends (and experts) expected the dollar to be at Rs.42 by the year 2010 and they even went on TV to boast about it (in fact one very learned "Professor" grilled me hard about this issue when i said that the dollar would reach Rs.48 and of course made fun of me) I only pray to the good lord and ask HIM to forgive the Professor for he knows not what he did:)

With negative interest rates, the FIIs will slowly start realizing that they are not making money anymore and losing due to the depreciating Rupee. I am categorically saying it again that the Rupee is expected to depreciate up to Rs.50 per dollar and you can expect FIIs to take a walk from the Indian markets for a short time.

The reasons for the fall in the markets will be the usual suspects (from the media viewpoint) lukewarm budget, inflation, scams and any other new "NEWS" they can find. but the writing on the wall is very clear. NIFTY at 4900.

Stray Thoughts on Financial Ratios

Whenever we talk of financial ratios, some students of finance who read only text books come up with weird rules and standards. On Monday I was conducting a viva-voce exam for some students. Most of the summer projects were ratio analysis of the company that they had worked in as interns. First of all ratio analysis is not a two month activity, at best it can be a three hour activity or an overnight assignment on finance, nevertheless these students spent an entire 60 days in companies and then came out with a report on financial ratios. That was the first thing that pout me off. the other thing that put me off was that one of the students confidently came up and said that the current ratio of the company he had worked in was at 1.8 and that it was not ideal. when asked about the ideal ratio he said it should have been 2. I asked him where he has read this, he mentioned the book of one of the finest gurus of finance in India (Dr. I M Pandey). I asked him to bring the book and read the paragraph where Dr. Pandey has categorically written that one should not follow this convention blindly. in fact he has not used the words "rule" or "standard" that goes to show how the students reads and understands according to his convenience.

I asked all these students about their perception of a great blue chip company. They cried ITC and Hindustan Unilever in unison. then i asked them to find out the current ratios of these two companies. being FMCG companies they invariably work on negative net current assets and therefore a negative working capital. That in fact is the reason for their high efficiency. the students went about finding out the current ratios of these companies and came out with the obvious: less than 1. Then the students were convinced that there is no hard and fast rule about the current ratio.

Current ratio (Current assets / Current Liabilities) is calculated to find out the liquidity position of a company or firm when the company or firm is an unknown one. If one is analysing a known brand and a company which is in business for a long time then this becomes redundant. If the company is able to dictate terms to its suppliers and its customers then it will always be in a position to use all the suppliers monies for financing its current assets making use of its own funds redundant. That shows why big companies with bigger brand names are in a position to sell for cash and buy at long credits, skewing their current ratios below unity and therefore operating with negative working capital.

A petty businessman with a lot of commonsense would find this article talking about the obvious. he always know that running a business with others money the right way of running a business.

Now for the opinion on the markets: I reiterate that the markets are poised for a fall. they may pick up some steam and even reach the earlier high of Jan 2008. The distance between today's indices and January 2008 highs is only 10-12%. This distance will be traversed in no time at all and all those investors who realise that the markets have gone up will be the ones who will buy between 5800 and 6250 of the nifty. I pray that more people read this part of the piece and refrain from any buying at these levels. and please do not feel left behind if the nifty actually goes above the 5800, because even if the nifty really touches the previous high it will fall to minimum of 3500 in the coming year 2011. So please reign in your horses. If you still plan to be in the markets then just trade, be nimble, get out at the faintest profit margin. The markets can start falling anytime from now to December and the fall will be substantial.

"If it isn't broken dont fix it" says RBI

That seems to be the mantra from our venerable Governor of the RBI. this credit policy is just a tweak with respect to raising the SLR to 25%. All the other rates have been maintained at the same level. RBI's review has pared down the GDP growth outlook of 6%.
The stimulation of the economy on the back of the financial crisis in the form of eased liquidity remains nearly constant. The powers that be, have been crying hoarse that it is still not time to repeal the stimulus given during the crisis. One fails to understand, why should the government not stimulate the economy constructively on a continuous basis? Why should the government only think of monetary measures when fundamental shift in stimulating the economies are needed?
The best form of stimulus would be to encourage individual savings and collective investments.
Now, what does one make of this credit policy? The policy may have said many things in words but as far as deeds are concerned, it is very clear. The Governor does not think anything is wrong and he does not want to rock the boat when everything is to the Government's satisfaction.
What do we expect in the market? The markets are more concerned with the slow growth expectations. We have already witnessed sluggish growth in corporate sales, this may start affecting the margins and profits in the next quarter. That is the fear in the minds of the players in the market now. The markets have also gone up on one way street for most part of the last year and the time for profit booking is ripe now.
So BOOK PROFITS AND DON'T WAIT TILL THE MARKETS TOP OUT.

TWO CIRCUITS AND A SCAM

The Indian stock markets hit two circuits and were closed for the day. It was an unprecedented thing that happened.

A decisive win for the UPA has brought back the bulls in the market with a long list of wishes.

1. Easing of FDI norms for Insurance sector.
2. Reform in the banking sector (especially on the labour laws side)
3. Disinvestment from public sector undertakings to make up for the deficit brought about from last year's doles.
4. Dismantling of the Administered Pricing mechanism for petroleum products.
5. Easing of interest rates and making credit available to the industry.
6. Boosting exports by implementing a new export promotion policy.
7. Spending more money on health, infrastructure and education.
8. FDI in the aviation sector.

I HAVE ONLY ONE COMMENT TO MAKE FOR ALL THIS WISH LIST. THIS LIST WILL REMAIN A LIST AND YOU WILL PROBABLY BE ABLE TO SEE ONLY 40% OF THIS LIST COMING TRUE IN THE NEXT FIVE YEARS.

AS FAR AS THE MARKETS ARE CONCERNED THE REGULATORS ARE NOT IN SYNCH WITH THE MARKETS AND THEY NEED TO REFORM THE MARKET FIRST. A TRADING OF 300 ODD CRORES CAN STOP THE MARKETS FROM TRADING AND CAUSE A UPPER CIRCUIT. THIS IS THE BIGGEST SCAM OF ALL TIMES AND NEEDS TO BE PROBED.

Additional reading http://www.moneycontrol.com/india/news/market-outlook/nothing-to-be-proud-of-vk-sharma/398047/1

If the market can be easily manipulated with 300 crores then it is a very shallow market. We first need stock market reforms and we need a regulator not an opinion maker in the regulators seat.

All the best.

Waiting to Exhale

The Great Indian Election Drama of opposing postures is coming to an end tomorrow. All those who thought that the third front and the UPA are different will be in for a rude shock when they will muster all their might to come to power and bury their so called differences under the carpet of secularism.

If you notice the election campaign this year, there were four formations.

1. The United Progressive Alliance: which was not united at all and a splinter went up to forming a fourth front. The alliance was characteristic of unabashed sycophancy and unbridled faith in the first family of India. This alliance also made last ditch efforts to salvage its well wishers by using the CBI to give clean chit to all the well wishing offenders. You must notice one fact that majority of parties forming a part of this front have a common last name i.e. Congress and they root for a common last name too. i.e. Gandhi.

2. The National Democratic Alliance: which was non democratic to say the least. This alliance brought up non-issues when the real issues were not received well by the public. They understood late in the campaign that short and direct television campaigns without the "creative" was the order of the day. They have still not understood that they have to become an inclusive party and not an exclusive party to come to power. Here inclusive means more members and keeping the doors open for new members. Now that the contentions of Article 370, Ram Mandir and Uniform civil code have been kept in the deep freezer there is actually no ideological difference between the two national parties.

3. The Third Front: Means a bunch of regional satraps broken away from the congress of yore. these parties are really drifters with the only aim to get into power. They prefer to call themselves more secular than the Congress or the UPA and they also profess to speak for regional aspirations. Their slogan is to oppose congress in the states and truck with the congress in the centre.

4. Fourth Front: This is a group of parties broken away from all the three fronts with the USP of being away from the congress, the NDA and the Third Front. they would like to jump to the highest bidder post results.

I had not blogged for a long time because of the "Aachar Sanhita" which i had imposed on myself, so that my clouded political views should not add to the political confusion in the minds of the readers.

Now that the elections are over and the ban on exit polls has been removed, Amateurs like me can hazard a guess as to what will happen to the results. I am Hazarding this guess just for the heck of it and my guess is going to influence my strategies in the market.

Now for predictions: I think the house will be evenly divided between three fronts. if you combine the third and the fourth fronts. Left parties will gain enough seats so that they cannot be ignored in the formation of a government. I think all "secular" parties will come together to form the new government and probably this formation will also be given a new name as UPA will not be acceptable to come constituents (probably because of the word PROGRESSIVE in it!). This formation will lobby hard for the leadership of the government and a new face will emerge as the contender for the PM's post. It will be either Pranab Mukherjee or P Chidambaram. Congress would not give away the PM's post at all. If congress is forced to give away the PM's post then they will not participate in the government and will lend support from the outside only to pull the rug in the next Eighteen months. So, it is certain that it will be a congress led government without Dr. Singh as the PM and Left parties participating in the government.

Now for the markets. As I had written in my previous post the Nifty lingered around the 3600 mark until the election results and now it will take a decisive turn. If the Left parties form a part of the government then brace yourself for Nifty touching 1760 and if they do not participate in the government then it would be 4250 and beyond.

So all eyes on KARAT / BARDHAN/ YECHURY.