Tuesday, July 13, 2010

Greed in the India Equity Markets

Infosys reported earnings that missed estimates today.  In addition the industrial production numbers came in at around 11% while the market and analysts were expecting 15%.

Other signs are also beginning to appear that the Indian economy is slowing down.  Obviously this is a case of glass half full or half empty.  The Indian stock market has avoided the doldrums faced by U.S., European and Chinese markets and has performed relatively better compared to these markets.

However, I see today's news out of Infosys as a sign that we are witnessing the exporting of a crisis as we have in the past.  In addition, BMW Audi and other German exporters are hiring due to an unexpected rise in demand.  This is exactly what was forecast to happen, the Europeans are exporting their recession to the Asian countries.

The Indian export model cannot survive a 20% devaluation of the Euro relative to the local currency.  The Indian economy has already started decelerating.  It is only a matter of time before the stock market acknowledges this.

The market can remain oblivious to bad news for longer than your account can stay liquid.  Making money in the market requires patience, or a microphone in the offices of Goldman Sachs and the Fed.

Today's Indian market is a product of greed by investors that are jumping back in (capitulating) as they see 18000 on the index and fear being left out.  Investing based on greed and fear usually results in losses. This time will be no different.  Now is not the time to be investing in equities.

Tuesday, July 6, 2010

A Massive Rounding Top in the Indian Stock Market

From a technical perspective the Indian Stock Market is building a massive rounding top which ties in well with the sentiment prevailing in the market.

We are going to spend the next few years going down.  Each time the market looks like it is off to the races, investors will jump in and subsequently get killed.  It's going to be a very long decline.

Every time the bottoms and rallies, people are going to say "OK, that's enough; it's over." But it won't be over. It's just going to be a long, long process. It will take a long time for Indian optimism to break down and reality to set in that the Indian story is closely linked, like every other country now, to global growth.

Optimism should actually remain dominant through the next two years and even as prices will be edging lower, most people are going to think it's a buy, and you shouldn't get out of your stocks, and recovery is just around the corner, probably for the next three years. And then, for the final half of the cycle, the final three years, that's when you'll get the capitulation phase when everyone finally gives up.

This is a non consensus view, as today the prevailing sentiment in the market is strongly optimistic.

Traxis Partners - Getting It Wrong.. Consistently - Perfect Contrary Indicators

In the summer of 2008, many of you may not remember this, Cyrille Moulle Bertaux of Traxis Partners came out with a WSJ article telling us that housing had bottomed and he had charts and data and analyses that convinced Traxis that the bottom in housing and the market was near.

Barton Biggs was consistently bullish through S&P 880 and the market bottomed at 666. 

Then in May of this year, we had Barton Biggs on Bloomberg when the S&P was around 1180 telling us that the economic recovery was strong and he saw another 15% upside in the markets.

As more of these bull market gurus fall, all it does is convince me that the entire pay structure for fund managers and Wall Street is skewed and this will be corrected before all is said and done.

Less than 1% of these guys has any skill.  The overwhelming majority are idiots and clueless about the markets and should not be managing money.

The only bigger idiots are the institutions that buy into their pitches and invest with them.

Barton made his name with the bull market of the 80s.  What is it that they say, do not confuse a bull market with brains?

Interestingly, Charles Reinhardt of Morgan Stanley is another uber bull equity whore that was predicting a multi year bull market at precisely the top on the S&P 500 in May.

Wall Street has truly become a wasteland and is being exposed for what it is - a bunch of talent less over paid back stabbers that will do anything to make a buck.

You would do well to ignore ALL advice you receive from investment companies, whether in the U.S. or India.

Friday, July 2, 2010

A Bubble In Optimism While the World Is Sinking

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We are bombarded from all corners of the country, the media, the television, the neighbors, the internet about how India's growth is unstoppable. 

The World Is Flat is a classic and bible of business.  Business titles about management, creativity, success dominate bookstore displays.  Thomas Friedman is the God of Business in a country that is comfortable with many Gods.  Consensus thinking rules and to be skeptical is akin to being unpatriotic.  It is a reasonable and understandable sentiment pervading the country.

Indians spent 50 years of being mauled by government policies that promoted corruption while suppressing  the entrepreneurial spirit of the people.  India is finally an arguably open market. 

The populace is bought into the growth story.  As with all bubbles, this one will only be evident after the fact.  Property prices have risen almost a 100 fold in many instances.  Not 100%, a 100 fold.  Yet the prevailing sentiment is that property prices will continue to rise.  An apartment in Gurgaon costs roughly $400,000 which would be enough these days to buy a mansion on the ocean in California.  Prices in India are no longer cheaper than the rest of the world.  Purchasing power parity has arrived for goods.  Compensation however is not keeping up.  Average salaries still hover under $25,000 a year for all except the businessman and higher level corporate executive. 

India's success came about as a result of India's cost advantages and economic reform.  Economic reforms continue but the cost advantages are starting to disappear.  Companies are now turning to villages to find cheap sources of capital.  But incremental business on the margin is being lost to the Phillipines and South America, Romania.

No country is an island.  Particularly not today.  Europe is struggling with massive debt and potential sovereign defaults.  The U.S. is not far behind but benefits from the ability to print unlimited amounts of the world's reserve currency and have debts denominated in dollars.  Yet I am told that Africa and islands in the southeast are growing and flourishing and will pick up the slack.

The most worrisome aspect is that Europe and the U.S. - the major markets for Indian exports - are in a deflationary vortex and a double dip recession is likely in the cards the second half of this year.  Europe has had a devaluation of its currency by around 20% which is another way of saying Indian exports just got 20% more expensive to that region.  China is slowing down dramatically as it is becoming apparent to the rest of the world that the growth story there was really a bubble that owes its origins to the now moribund U.S. consumer.

Worry not, I am told.  Government spending and domestic demand will pick up the slack.  Unfortunately, the lesson of the past 2 years from the U.S. and countless other countries over decades is that government spending is rarely an efficient use of capital and its effects are temporary and usually not multiplicative.  Much depends on the monsoon and optimism about the monsoon is justified by the weather forecasters, which may be the only profession with predictive powers worse than those of economists.

Investing is about the future, not the past.  The market already recognizes the growth of the Indian market over the past few years and it is priced in the valuation of stocks.  The future however seems far more doubtful. 

Japan was anointed the new superpower before a dramatic 20 year decline that continues.  The Tiger economies were dominant in the 1990s and anointed kings untill a dramatic collapse in 1997-1998.  China was anointed the next heir to the throne but the fall from the throne looks to be quite nasty.  It is India's turn.  Will India deliver where others have failed.  The consensus thinks so.  The consensus is usually wrong.

Wednesday, June 30, 2010

Investment in stocks NOT a must for a complete and balanced portfolio

The Economic Times reports today

Investment in stocks must for a complete and balanced portfolio
'If you really want your money to grow - stocks is the only way to go'- Haven't you heard this umpteen times. Well, it holds true every time.

As compared to fixed deposits, investments in equity will pay 26.5 per cent higher returns in 5 years. Even for a longer term, investment in stocks pay higher returns even in comparison to real estate and gold. 
Investments in equity WILL? pay 26.5% higher returns in 5 years? Well there you have it... Economic Times India writers know exactly what equity market returns will be in 5 years.  And if they know what equities are going to do, why are they writing newspaper articles, they should be hedge fund managers.

They trot out Infosys and Tata Steels.  Tata Steels share price performance is shown above.  What if you were unfortunate enough to have bought tin 2006 and sold in fear in 2009? You would have a significant loss!

That is the issue that unsuspecting investors in India are learning for themselves.  Stop listening to the mutual fund industry marketing buzz and start being wise investors.

There is a time to buy equities and when that time comes, I will invest agressively.  Today is not that time.
Success in the markets requires patience and waiting for the fat pitch.  Investors entering the market today are likely going to be disappointed as opposed to investing in secure investments.

Tuesday, June 29, 2010

Management Hubris - India Decoupling Stock Market Will Be A Myth

How ironic that HDFC's Aditya Puri's article prints today just when the China market is down roughly 5%.

Here is the link to HDFC Aditya Puri article "Decoupling is set to become a reality soon" a self serving media spin article by the head of HDFC Bank

I am going to deconstruct his comments.  Mr. Puri makes the argument - correctly - that European and American economies are struggling and the world has changed structurally.  True, no arguments there.

The financial markets, however, are slow learners, creatures of habit, and therefore, create confusion in the short-term or transition (defined as volatility) period.
Really? I would love to know when the markets corrected in Nov 2007 they foresaw a correction ahead in 2008.  I do not know if Mr. Puri made any such calls and protected his stockholders.  Fact is that yes, markets do forecast 9 of the past 5 recessions but they usually are smarter in sum than any one individual.  Anyone that considers himself smarter than the market is suffering from a God complex and has an ego problem.

The forecast GDP growth rate during the next 3-5 years for the following countries are (%): US: 1.8; Europe: 0.8; East Asia: 8; China: 8.5; India: 8. This reflects the level of structural adjustments required in the Western countries in terms of asset bubbles, financial contagion, stimulus, exchange rate, etc. 
I am stunned that any corporate executive would be out there spewing forecast statistics, that too from economists? Economists forecasting record for this cycle and most cycles in my lifetime has been dismal.  The fact that economists are forecasting 8% growth rates for Asia is meaningless.

These same economists were forecasting similar forecasts for Japan in the late 80s and the Tiger economies in the mid 90s.

Besides, investors seeking higher returns on their investment will flock to Asia; this will result in a flood of capital and Asian currencies will see a phase of secular rise against their G-7 counterparts. This could erode export competitiveness, and economies within Asia such as India and Indonesia that are more internally focused, will outperform the others.
Yes, investors will probably flock to Asia to seek higher returns.  However, in a bear market, there are no safe havens.  Just as almost every company benefited during the bull market from global market expansion, what I am seeing today is that there is deflation in Europe and the U.S. and wages are falling dramatically in these countries while wages are rising and inflation is rising in India and China.

Further, Europe has exported a 20% decline in its currency, the net result of which will be a deterioration in competitiveness for India and China.

It is shocking to me that the CEO of one of our major banks does not recognize the risks posed by a rising Rupee.  The consensus today is that India will decouple.  The consensus will be proven wrong in the near future, yet again.

Mr Aditya Puri might want to check the performance of China over the past 12 months and would see that the present market correction / selloff initiated in China.

We are entering a phase where the recession is about to be exported to Asia.  Europe and U.S. have experienced significant declines and a severe recession.  However, a double dip is likely headed.  This time around, emerging markets will suffer along side global markets.

There is no decoupling. 

Here is the first piece of news that Mr. Puri would do well to read. 
Chinese growth May Slow

Monday, March 15, 2010

China & India - No Economic Miracles, Just Purchasing Power DISParity

As I sit here newly arrived in India, I am amazed at how the public is convinced and fully bought into the hype.

Maybe over time I will stand corrected and begin to see the miracle that is India.
But I know what I see now.  I see a preconstruction cycle that I saw play out in the U.S. firsthand.  I see an unending supply of land. 

I see a populace that is hustling.  It's surprising the number of kids here that are desperate to retire in their 30s and 40s.  Maybe that is a sign of prosperity.  More likely, they are hating life and sick and tired of the misery that is called a U.S. multinational (MNC).  These corporations are chewing and spitting out these workers and garnering market share.  Over time Indians will learn the same painful lessons learnt in the U.S.  ... Walmart versus the Mom n Pops, Credit Card misery and teaser interest rate nightmares.

What I also see is that there is a purchasing power disparity.  Everything is cheaper in India, for the most part, except for imported items.  Those trade at global parity give or take a few bucks.  And that more than anything explains the economic miracle that  is India.  This will continue until the disparity disappears.

But already there are cheaper options emerging - the Phillipines, European Eastern Bloc countries like Romania etc.  India has to move up the value chain, is what the experts say.  What exactly does that mean?

More R&D, higher education, more creativity.  And here is where the miracle will run into roadblocks.  India lacks the infrastructure - physical and electronic - to make this a reality.  Yes there are certainly pockets of wizardry.  But the economic product is a sum total of the market.  Color me skeptical.  And possibly wrong.  I will gain more confidence in my views as I get more insight.

Real Estate in Gurgaon Is Peaking, Optimism Reigns, I Am Shorting S&P 1150

I am in the land of the optimists.  Indians are truly an optimist populace.

But tell me what I am missing.  A friend of mine rented a 4 bedroom luxury condo in Gurgaon, India.  For those of you that are unaware of Gurgaon, it is an IT and BPO hub, probably the largest in India outside of Bangalore.

Here's what the building looks like:

Now you can buy a unit in this building for Rs 1,54,00,000.  Or $342,000.
Or you can rent for Rs 45,000 per month.  Or $1,000 per month.
A back of the envelope calculation suggests the cost of ownership is roughly $2,300 per month at 10% down, not including taxes and maintenance, which I am guessing is another Rs 10,000 per month minimum, or $250.

Two things come to mind.  The market is overheated as is obvious to any real estate investor/owner living currently in the U.S.  Second, the actual cost of ownership is still pretty cheap to be able to rent a 4 bedroom luxury apartment with all amenities for under $1,000 a month.

Now the lack of  rental pricing pressure tells me that these greedy developers will keep developing until the marginal cost of development and sucking in preconstruction investors is exceeded by the risk.  There is no shortage of land around Gurgaon.  Nor for that matter in Bangalore, Pune, and other IT hubs.  And they will keep developin this until buyers are exhausted, unwilling and uninterested.  And the cycle will turn. 

While there is a purchasing power advantage in India, I think it is deflation in the U.S. that will eventually bring the U.S. to parity with India.  Either way, color me somewhat skeptical about India's emerging superpower status.  India has enjoyed tremendous advantages in terms of costs when offering BPO services to U.S. corporations. 

It has been a story driven by cost advantages.  Indian workers and Indian infrastructure is not more efficient than the U.S. 

India also has the benefit of a young work force with some 60% of the population under the age of 40.  But I am guessing there will be a lot of older guys willing and able to work in the U.S. for  a long time to come.  Sad but true.

As far as the market goes, the average retail investor is now growing ever more confident and complacency is rampant.  As we all know, it is precisely times like these that the market serves up a cruel reminder.

Friday, March 12, 2010

Greed or Fear for the Rest of the Year?

Now that I am somewhat settled in India, I hope to recommence my commentary on the Stock Markets.

With the preponderance of articles available on the Indian market and my distance from the U.S. markets - I am now living in Gurgaon, India - I intend to focus more on the global macro environment as well as Indian stock market.

Having somewhat successfully timed the previous top 1150 and exiting in the 1085 range on the S&P 500, the same setup presents itself.

My three weeks in India have been illuminating in terms of the optimism that is driving this market.  But I fear that most - actually almost all - investors are naive about the markets and may end up learning some harsh lessons.  Even the supposed pros posting their views in the Outlook India magazine this month seem inexperienced to deal with the challenges of the current market.  One that impressed me though - Sanjoy Chatterjee.  I learnt something while reading his missives.

Coming back to the markets, global markets have moved in synchronized fashion since the March lows and each has been flirting with technical retraces.  It is striking how optimistic Indians are about the economy and their future prospects and in striking contrast to my experience in the U.S. (Florida, NYC).

The Indian story reminds me of the U.S. circa 2007, soaring and ridiculous real estate valuations, a consumer addicted to purchasing and an expectation of continued hockey stick progression.  One difference though is that the Indian consumer is spending within his means and not overextended, yet.  All that could change though, were the real estate market to correct as a significant amount of  wealth is being attributed to the mind boggling rises in property values.

Investors - particularly institutional - continue to ignore the ramifications of a market that is driven by huge amounts of liquidity pumped in by central banks.

In anticipating what  lies ahead, it will certainly not look like the consensus.  The consensus is a global economic recovery and improving fundamentals.  Certainly that is what stock markets are forecasting.  The risks are significant - particularly of the sovereign variety - but the catalyst for a surprise is lurking in the shadows.

Markets are beginning to see positive economic news.  It is precisely in this type of economic environment that the policy execution risk becomes elevated and a misstep could lead to unexpected consequences.

Given the overvaluation in equities, the moribund U.S. consumer, severe amount of monetary stimulus in the global economy and the weakening sovereign balance sheets, the risks look to outweigh rewards at these levels and this stage of the rally.

Wednesday, January 13, 2010

Re Entering Short S&P 1147

Bullish sentiment continues to increase as measured by both the weekly II data and a Bloomberg survey. II said Bulls rose to 53.4 from 48.3, the highest since Dec ‘07 while Bears fell 1 pt to 15.9, just shy of the lowest since Apr ‘87.

Bloomberg said bulls on the US market rose to the highest since ‘07.