RULES FOR 2014

Technical analysis is a windsock, not a crystal ball. It is a skill that improves with experience and study. Always be a student, there is always someone smarter than you!

• “Thou Shall Not Trade Against the Trend.”

• Let volatility work in your favor, not against you.

• Watch what our “Politicos” do, not say.

• Markets tend to regress to the mean over time.

• Emotions can be the enemy of the trader and investor, as fear and greed play an important part of one’s decision making process.

• Portfolios heavy with underperforming stocks rarely outperform the stock market!

• Even the best looking chart can fall apart for no apparent reason. Thus, never fall in love with a position but instead remain vigilant in managing risk and expectations. Use volume as a confirming guidepost.

• When trading, if a stock doesn’t perform as expected within a short time period, either close it out or tighten your stop-loss point.

• As long as a stock is acting right and the market is “in-gear,” don’t be in a hurry to take a profit on the whole position, scale out instead.

• Never let a profitable trade turn into a loss and never let an initial trading position turn into a long-term one because it is at a loss.

• It’s not the stocks that you sell that go higher that matters, it’s the stocks you don’t sell which go lower, that do.

• Don’t think you can consistently buy at the bottom nor sell at the top. This can rarely be consistently done.

• Don’t buy a stock simply because it has had a big decline from its high and is now a “better value;” wait for the market to recognize “value” first.

• Don’t average trading losses, meaning don’t put “good money” after “bad.”

• Your odds of success improve when you buy stocks when the technical pattern confirms the fundamental opinion.

• We can’t control the stock market. The very best we can do is to try to understand what the stock market is trying to tell us. As I like to say, “Overweight Statistical Probability. Underweight Emotion!”

• Understanding mass psychology is just as important as understanding fundamentals and economics.

• When investing, remain objective. Don’t have a preconceived idea or prejudice. Said another way, “the great names in our business … the Paul Tudor Joneses; the Steve Cohens; the Andy Halls; the George Soros’…all have this same trait: the ability to shift on a dime when the shifting time comes.”

• Any dead fish can go with the flow. Yet it takes a strong fish to swim against the flow. In other words, what seems “hard” at the time is usually, over time, right.

• Don’t make investment or trading decisions based on tips. Tips are something you leave for good service.

• Where there is smoke, there is fire – bad news is usually not a one-time event, more usually follows.

• To the best of your ability, try to keep your priorities in-line. Don’t let the “greed factor” that Wall Street can generate outweigh other, and just as important, areas of your life. Balance the physical, mental, spiritual, relational, and financial needs of life.

RISK MANAGEMENT

1.)Overcome fear

2.) Remain flexible – When you don’t know what’s going to happen, the best strategy is to be ready for anything.

3.) Take reasoned risks – reasonable exposure and positive edges only.

A Reasoned risk is more like an educated guess rather than a roll of the dice.  A Reasoned risk limits exposure so that one or a few trades will not affect the trader’s account too adversely should the trades turn out badly.  Great traders aren’t gamblers.

4.) Prepare to be wrong

5.) Actively seek reality

6.) Respond quickly to change – When a trader determined a place to get out of the trade, a competent trader will respond quickly.

COAL MINISTRY ISSUES NOTICES TO TATA STEEL, HINDALCO,

The Coal Ministry has issued show-cause to eight firms including Hindalco Industries and Mahanadi Coalfields, and sought explanation from five firms such as JSW Steel, Tata Steel and Power Finance Corp, for delays in commencing production from mines allocated to them.

“You are hereby called upon to show cause, on each milestone separately to this ministry…as to why delay in the development of the coal block(s) should not be held as violation of terms and conditions of the allocation…and why the block should not be deallocated,” the coal ministry said in show-cause notice letter to firms.

The ministry further said that if the companies fail to give reasons for the delays, “it would be presumed that the company has no explanation to offer and action as appropriate would be taken against your company(ies) for deallocation”.

The eight companies issued show-cause notices include Mahanadi Coalfields Ltd, Hindalco Industries, Neyveli Lignite Corp for Talbira II and III coal blocks. In the case of the Talabira coal block in Odisha, CBI had in October lodged a case against industrialist Kumar Mangalam Birla and former Coal Secretary P C Parekh for alleged irregularities in allocation of mine eight years back.

The notice has also been issued to Ispat Godavari Ltd, Ind-Agro Synergy Ltd, Nakoda Ispat, Vandana Global, Shree Bajrang Power & Ispat Ltd for delaying the production from Nakia I & II coal blocks.

In letters to five firms — JSW Steel Ltd, Bhushan Power and Steel Ltd, Jaibalaji Industries, Tata Steel and Power Finance Corp — the coal ministry said “You are hereby called upon to explain…the reasons for slow progress as well as the efforts made by you in development of coal block (s) failing which it would be presumed that your company(ies) has no explanation to offer and action as appropriate would be taken.”

The ministry sought explanation from JSW Steel Ltd, Bhushan Power and Steel Ltd, Jaibalaji Industries for slow progress in respect of Rohne coal block, Tata Steel for Kotre-Basantpur and Pachmo coal blocks and Power Finance Corp for Meenakshi, Meenakshi and Dipside Meenakshi coal blocks.

TO TRADE OR NOT TRADE

In trading activity alone does not make money, the right activity at the right time is what makes money. Many times the right thing, is to do nothing.

In your actual trading you have to do four things very well to make money.

You have to know when to get in.

Only enter trades that have the highest probability of success and the best risk/reward ratio. Buy the best monster stocks during up trends. Short the fallen leaders when the game changes and they are under the 50 day. Buy the monster stocks at the gift of the 200 day moving average. Short down trending junk stocks. Go where the trends are.

You have to know when to get out.

When your trade reverses through a key support get out. When the market trend changes get out of your long positions. When your stop loss is hit, get out. When the stock reverses and hits your trailing stop, get out.

You have to know when to stay in.

If you enter a stock with the potential to trend let it run as far as it will go. Do not set a target, just trail your winner with a stop. Let the stock tell you when it is done running. Do not cut your winners short. 

And most importantly you have to know when to stay out.

If you do not know what to do, do nothing. If the charts confuse you, stay out. If the volatility is escalating and you are losing in every trade, stay out. If you are a trend trader and you see no potential trends, stay out. If you want to go long but all the stocks you want are going down, stay out.

8 TIPS FOR TRADERS

1. CONFIDENCE: absolutely essential in an environment that feeds on emotional    instability.

2. TRUST: if you cannot trust yourself who can you trust? Trust your rules, trust your edge, trust that you will do the right thing-no matter what!

3. FOCUS: you will never learn all there is to learn about the market.  Push your ego aside and focus on one market and one edge.

4.  ACCEPTANCE:  you have to accept what the market is willing to give or you will give the market what it wants to take.

5.  RESPONSIBILITY: you and you alone are responsible for the money you lose and the money you make.  Take the credit for both.  Either way you deserve it.

6.  PATIENCE:  The market is not the place to learn patience, it is the place to practice it.

7.  RULES:  the market has no rules and no one else will do it for you. Develop rules for entering AND exiting trades before trades are made.

8.  RESPECT:  you have to respect the market for what it is not for what you want it to be.  The market has a logic all its own.  You may not like it but you have to accept it.

FITCH ON TATA MOTORS

Fitch Ratings has affirmed India-based Tata Motor Limited’s (TML) Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BB’. The Outlook is Stable.

KEY RATING DRIVERS

Robust Financial Profile: TML’s consolidated financial profile remains robust. The company’s consolidated net leverage remained low at 1.09x in FY13 (FY12: 1.24x) while EBITDA interest cover was 6.91x (FY12: 7.95). The strong credit metrics largely reflect strong sales and profitability at TML’s UK-based subsidiary Jaguar Land Rover Automotive PLC (JLR; BB-/ Stable).

Fitch expects TML’s financial profile to remain robust despite its large capex plans. The company invested INR187.6bn during FY13, which is likely to increase further during the next three years as it spends on product development and new technology, and on expanding production capacity at JLR. The agency expects capex to be largely funded from operational cash flows. TML’s strong financial flexibility, and the large cash balances (2QFY14: GBP2.7bn) and undrawn committed facilities (2QFY14: GBP1.3bn) at JLR also contribute to the robust financial profile.

Strong Performance of JLR: JLR’s strong sales and profitability momentum in FY11-13 have been underpinned not only by buoyant underlying demand for premium vehicles, but also by a strengthened product portfolio and a number of successful model launches (including the Range Rover Evoque, Range Rover Sport, and Freelander 2). JLR’s January-November 2013 sales volume increased across all regions, including in Europe, despite an overall decline in sales given the weak market conditions. Fitch expects the performance of JLR to remain strong over the medium term with stable profitability and rising sales volume supported by its strong brand positioning, favourable operating environment and new product launches.

Weak Standalone Performance: The standalone performance of TML continues to remain weak. The company’s sales volume continues to be impacted by weak auto demand in India on account of high fuel prices, high borrowing costs and weak consumer sentiment given the economic uncertainty. The domestic sales volume of TML’s commercial vehicles fell by 23.7% and that of its passenger vehicles dropped by 36% during the April-November 2013 period.

TML also faces rising competition across all its segments. While the company has maintained its strong market position in the commercial vehicle segment with over 50% market share, its share of the passenger vehicle market declined. Fitch expects demand to continue to remain weak in the near term, but an improvement in economic growth and TML’s plans for new product launches could support a turnaround in the company’s performance.

Linkages with Tata Group: The FC IDR of TML continues to benefit from a one-notch uplift on account of potential support from the Tata Group. Fitch assesses the linkages as moderate in line with its Parent and Subsidiary Rating Linkage methodology. Any weakening of linkages between the group and TML, and/or the group’s inability to provide support would likely affect the ratings negatively.

RATING SENSITIVITIES

Negative: Future developments that may collectively or individually lead to negative rating actions include:

- a weakening of linkages between the Tata Group and TML

- consolidated financial leverage (excluding TML’s auto financing subsidiary Tata Motors Finance Limited) exceeding 2.0x on a sustained basis due to reduced sales or profitability (at TML, JLR or both), or due to higher than expected debt levels

Positive: Future developments that may collectively or individually result in positive rating actions include:

- strong growth in sales volume for TML (standalone) and JLR through increased geographic and product diversification, while maintaining strong profitability

TRADING QUOTES

“I think successful trading, or poker playing for that matter, involves speculating rather than gambling. Successful speculation implies taking risks when the odds are in your favor. Just like in poker, where you have to know which hands to bet on, in trading you have to know when the odds are in your favor.” – Sperandeo

It is interesting that Sperandeo makes a point to define the difference between speculating and gambling. He discusses how he never viewed playing poker to be gambling in the same respect that slot machines are gambling. In poker, he had the knowledge  of which hands had the highest probability of winning and the option to only play the highest probability hands. This draws a direct correlation to trading. We know from our study of historical winners what qualities make up stocks that go on big runs and we have the option to only play those key stocks

Looking at trading in this respect breaks it down into two important goals. We have to know which kinds of stocks have the best odds of going on huge runs. We also have to have the timing skills and the guts to play those stocks when we encounter them and the patience to sit on the sidelines when when there aren’t good options.

“Trading the market without knowing what stage it is in is like selling life insurance to twenty-year-olds and eighty-year-olds at the same premium.” – Sperandeo 

Again here, we see Sperandeo drawing a real world comparison to stock trading. He discusses that you just as the odds would be better if you sell life insurance to a twenty-year-old compared to an eighty-year-old, the same can be said when trading a young trend compared to trading an extended trend. He doesn’t necessarily say you should trade a new trend or shouldn’t trade an extended trend, but that you should strongly factor that in to your timing decisions. 

“To be a successful trader, you have to be able to admit mistakes. People who are very bright don’t make very many mistakes. In a sense, they generally are correct. In trading, however, the person who can easily admit to being wrong is the one who walks away a winner.” – Sperandeo

It is fairly obvious at this point that the most common advice from all of the Market Wizards interviews is that you absolutely must cut your losses quickly. The reason that many traders are unable to do this is that they are not good at admitting that they are wrong. Sperandeo suggests that many extremely intelligent traders suffer from this inability to admit that they are wrong because for most of their lives they have always been right. It goes against human nature to admit a mistake.

This is an area where I think that a lack of self-esteem can be a tremendous asset to a trader. Being unsure of yourself may be difficult to deal with in real life, but in trading, it can make you a winner just by keeping you from being a loser.

“Ty Cobb once was asked why he never had slumps. He said that whenever he felt himself getting into a slump, he wouldn’t try to get a hit, but he would simply try to make contact with the ball. To relate that concept to trading, when you’re in a slump, try to be patient and wait for a trade that you feel very confident about and keep the bet size small. Your goal should not be to make lots of money but rather to get your confidence back by making correct decisions.” – Sperandeo

I love baseball references, and this one has a strong relation to trading. More than a few of the Market Wizards have advocated cutting back the size of your trades while suffering through a losing period to take the pressure off. This sums up the reasoning behind that advice really well. 

“Being involved in this business requires tremendous dedication and desire. However, you shouldn’t make trading your whole life. You have to take time off. You need to spend time with loved ones. You need to balance your life.” – Sperandeo

I felt like I had to include this in the top five quotes simply because it struck me as the exact opposite of how I perceive most of the Market Wizards. It caught me off guard to see someone point out that you shouldn’t let trading consume your entire life. There have actually been interviews that led me to believe that letting trading consume my life would be the only way I would ever be successful. It was refreshing to hear someone as successful as Sperandeo point out the need for a balanced life. 

LEVELS FOR NIFTY & BSE

SENSEX (21,079.7)

In the midst of key events and volatility, the Sensex zoomed 1.7 per cent or 364 points for the week. However, it is now testing a key resistance at the 21,000-level. A robust start to next week can emphatically surpass this resistance and take the index higher to 21,206 and then to 21,500 in the coming week. Failure to move higher can find base at the important supports of 20,700; 20,300 and 20,137.

The index can confine itself to trading in the band between 20,000 and 21,500 for a few more weeks. This sideways movement will be a positive sign from a long-term perspective.

For the index, the medium-term trend is up. This trend will remain in place as long as the index trades above 19,850 levels. A fall below this level will threaten the medium-term trend. As mentioned in this column last week, the next key supports are placed at 19,405 and 18,955.

NIFTY (6,274.2)

The Nifty rallied 105 points or 1.7 per cent in the previous week. It managed to rebound from its 50-day moving average and close well above this average line. However, it is now facing key resistance at 6,300-level. A strong breakthrough of this resistance can take it northwards to 6,350 and on to 6,415 in the ensuing weeks. But, any inability to surpass this resistance level can see it slip to find supports at 6,166, 6,050 and 5,973. The next important support below these levels is at 5,905.

The index can prolong its sideways movement for some more weeks in the zone between 5,950 and 6,400. This move will be positive for long-term prospects. The medium-term trend is also up for the Nifty, and as long as it trades above 5,920 this trend remains in place. A tumble below this level can activate supports at 5,770 and 5,618 levels.

PANIC IN NIKKEI ON MONDAY

The Japanese government forecast on Saturday that real gross domestic product will grow by 1.4 % instead of 2.6 % growth for the current year as a planned sales tax increase is seen dampening consumption.

The forecast is part of the annual budget review. The government projects about Y50tn ($480bn) in tax revenue for the coming fiscal year based on the growth forecast.

While higher sales tax is expected to curb consumption, the government expects positive economic growth thanks to the effects of a fiscal and monetary stimulus.

The national sales tax is set to rise to 8 per cent in April and could rise to 10 per cent in 2015 if the government of Prime Minister Shinzo Abe goes ahead with its fiscal consolidation plan.

The government also forecast that consumer prices will rise by about 1.2 per cent in the 2014 fiscal year, without considering an impact from the sales tax hike. Consumer prices are expected to show a rise of 0.7 per cent in the current fiscal year. The Bank of Japan launched a massive monetary stimulus programme aimed at pushing the inflation rate up to 2.0 per cent in two years, in a bid to wrench the country out of a long phase of deflation.

BRITAIN - FASTEST GROWING G-7 ECONOMY

Advanced economies will get their “mojo” back in 2014 as the UK retains its crown as the fastest-growing major European economy next year, according to analysts.

PwC, one of the world’s “Big Four” audit firms, said Britain’s brighter growth prospects could also put it in line to be the fastest-growing economy in the G7.

Richard Boxshall, an economist at PwC, said the UK, which is expected to grow by up to 3pc next year, would be “level pegging” with America for the title of the strongest-growing advanced economy in the world. “It’s too close to call,” he said.

Advanced economies such as America, Japan and Britain are expected to contribute about 40pc to global GDP growth for the first time since 2010 next year, up from levels closer to 30pc between 2011 and 2013. Improving consumer confidence will feed through to higher business investment among advanced economies, PwC will say in its annual predictions this week.

“It’s been quite a long, slow recovery from the crisis, and for the first time in what feels like an awfully long time — about five years or so — low-growth advanced economies are really starting to pick up, and that it is increasingly self-sustaining,” said Mr Boxshall. “It’s coming through private sector growth, rather than relying too much on government fiscal support.”

SCHOOL MAKES ME

LEVELS FOR NIFTY IN THE COMING WEEK

The Nifty too, hit a new life-time high 6,415.2 in the opening hour of Monday and then lost ground rapidly to end the week 91 points lower.

The index is following the script given as the first option last week. This could be the third part of the correction that began from the 6,342-peak in the index. This wave has the targets of 6,187; 6,046 and then 5,905. There is thus, a slight possibility of the correction ending at these levels. But if the decline continues, the index can head towards the next levels.

There is a strong likelihood of the index moving in the band between 5,950 and 6,400 for a few more weeks before it attempts to move higher. The medium term view will turn negative only on close below 5,920. Subsequent supports are 5,770 and 5,618.

A rebound next week can make the Nifty head higher to 6,262 or 6,323. The inability to move above the first resistance will be the cue for traders to initiate fresh short positions. Downward targets are 6,046, 5,973 and 5,905.

TEN WAYS TO BE A TRADER

1.       Trade based on the probabilities NOT the potential profits.

2.       Trade small position sizes based on your account NEVER put your whole account at risk of ruin.

3.       Trade a plan NOT emotions.

4.       Always enter a trade with an edge that can be defined DO NOT trade with entries that are only opinions.

5.       Trade based on quantifiable facts NOT opinions.

6.       Trade after extensive research on what works and what does not. Don’t trade in ignorance.

7.       Trade with the correct position sizing since risk management is your number one priority and profits are secondary concern.

8.       Trade in a way that eliminates any chance of financial ruin NOT to get rich quick.

9.       Trade with discipline and focus DO NOT change the way you trade suddenly due to winning or losing streaks.

10.    Trade in the present moment and DO NOT get biased due to old wins or losses.

INVESTMENTS THROUGH P-NOTES RISING IN INDIA

Investments through participatory notes (P-notes), typically used by foreign investors not directly registered with the stock market regulator in India, touched a near two-year high in October.

These investments stood at Rs 183, 862 crore at October-end, the highest since May 2011. The P-note route is generally used by wealthy investors abroad, hedge funds and other investors who want to participate in the Indian markets but without being registered with the Securities and Exchange Board of India (Sebi) as foreign institutional investors (FIIs).

Flows into Indian equities through the P-note route have been rising, due to currency depreciation and continuation of the stimulus programme of the US Federal Reserve, say market watchers

LEVELS FOR NIFTY FUTURE 21 ST NOVEMBER 2013

Watch :6124 ,6110 as Support levels.

Now SUPPOSE Breaks 6110 with volumes and stays below for 20 minutes …………………………Then ??

Nonstop Slide upto 6066———6052 not ruled out.

Three Consecutive close above 6219 will take to 6290—–6313 level  (valid only if not breaks 6008 level )

INDIA INC FINANCIAL HEALTH SLIPS

Even as the September quarter earnings of Sensex companies managed to beat Street estimates, the financial health of India Inc deteriorated. According to a Credit Suisse report released on Tuesday, corporate financial health worsened in Q2 as 34% of loans were with firms with interest coverage (IC) ratio of less than one. In previous quarters, corporates with a lower ability to service debt had 31% of loans.

Interest coverage ratio compares the interest expense during a period to a company’s operating profit and reflects a company’s ability to service interest on its outstanding debt. A lower value indicates lower debt servicing ability.

The CS report observed that within the category, 80% of loans were with companies whose interest coverage was lower than one for at least four quarters in the last two years and 26% of loans were with companies that had dismal interest cover in the last eight consecutive quarters.

It further noted that concerns over debt-servicing ability of infrastructure and real estate firms persisted. “In Q2, the share of infra and real estate companies among the IC<1 companies rose as JPA, DLF and HCC were added, while Adani Ports and R Comm went off the list,” added the report prepared by analysts Ashish Gupta, Prashant Kumar and Kush Shah.

Moreover, with the loss-making companies accounting for nearly 26% of the sample debt, the net worth of these companies witnessed an erosion of 22-80% in the last two years while their debt levels went up, said the report.

On the back of continuing cash-flow strains and currency depreciation, debt levels for most of the stressed corporates increased by 5-12% in the first half of the current fiscal. These consists of eight of the nine largest companies, including Adani Enterprise, GMR Infra, Lanco Infra and JSW Steel with an interest coverage ratio of less than one.

Meanwhile, a slowdown in the economy put stress on sectors such as power and metals, which continued to depend on bank loans. “Bank loan growth to stressed sectors like power (26% y-o-y) and metals (21% y-o-y) remained high,” the Swiss-based brokerage added.

FIRST ALL WOMEN BANK IN INDIA

Bharatiya Mahila Bank, the country’s first all-women commercial bank, commenced its operations on Tuesday with seven branches. However, doubts remain if the bank will succeed in achieving its objective of economic empowerment of women in remote villages.

The setting up of the Bharatiya Mahila Bank is a small step towards the economic empowerment of women. It is also a reflection of our commitment to this cause. I am sure that the bank will fulfill the objective with which it is being established, namely financial inclusion of women and providing them equal and easy access of financial services,” said Prime Minister Manmohan Singh while inaugurating the bank's first branch in Mumbai's Nariman Point.

Bharatiya Mahila Bank has been set up with an initial paid-up capital of Rs 1,000 crore. Led by Usha  Ananthasubramanian, all the eight on the board of directors of the bank are women. The bank aims to increase its branch count to 25 by March 2014.

This is time to Lay the foundation for a Wealthy Future....

PENALTY FOR RELIANCE

The government has slapped an additional penalty of $792 million on Reliance Industries Ltd (RIL) for producing less than targeted natural gas from its eastern offshore KG-D6 block.

A notice disallowing $792 million out of the cost already incurred on the Bay of Bengal fields was sent to RIL on November 14, an oil ministry official said here.

With this, a total of $1.797 billion penalty in form of cost being disallowed has been levied on RIL for producing less than targeted output during the past three years.

The company has till date spent $10.76 billion on the block, which it can contractually recover from sale of oil and gas. It is obliged to share the profits with the government only after recouping those expenses.

The official said the cost has been disallowed as RIL and its partners BP plc of UK and Canada’s Niko Resources did not drill the committed number of wells, which led to output dropping by over 80 per cent from the main Dhirubhai—1 and 3 (D1&D3) gas fields in the KG—D6 block.

D1&D3 fields have in the first fours years of production (2009—10 to 2012—13) produced a total of 1.853 trillion cubic feet of gas, 1.196 Tcf short of 3.049 Tcf that RIL had committed to produce in the 2006 development plan.

But for the first year, the output has lagged the targets in all subsequent years, which has led to a huge chunk of facilities built lying unutilised, the official said.

RIL had built facilities to handle 80 million standard cubic metres per day of gas from D1&D3 but the present output is just 8.78 mscmd.

As per the production sharing contract, RIL and its partners BP Plc and Niko Resources are allowed to deduct all of the capital and operating expenses from sale of gas before sharing profits with the government.

Creation of excess or unutilised infrastructure impacts government’s profit share and this is being sought to be corrected by disallowing part of the cost.

According to the approved field development plan, the output should have reached 80 mscmd last fiscal.

The government had previously issued a notice to RIL disallowing $1.005 billion in cost for shortfall in production during 2010—11 and 2011—12 ($457 million for 2010—11 and the rest $548 million for 2011—12).le

TAPERING - SECOND ROUND

But the path With just six weeks of 2013 left, the question of when the Federal Reserve will begin to drain stimulus from the US economy remains the dominant one in financial markets. And with good reason.

It’s hard to find a financial market that wasn’t jolted in the early summer, when departing Fed chairman Ben Bernanke first signalled that five years of easy money was coming to an end.

US Treasury yields soared more than a percentage point; riskier assets, including emerging market bonds, equities and currencies were clobbered and the dollar jumped.

While the conversation about when the Fed will begin to slow – or taper – its stimulus programme still dominates, some are sceptical that financial markets will deliver a repeat of their summer swoon when the central bank does eventually reduce its bond-buying programme.

Economists at JPMorgan, for example, point out that emerging market assets – a beneficiary of the Fed’s bond-buying programme – have now priced in the likelihood that the central bank will tighten the stimulus tap.

As a proxy, they point to the spread (or difference in yield) between dollar-denominated junk bonds sold by emerging market companies and those issued by US companies. As the chart below shows, the spread has remained close to levels reach in May, when an added layer of risk was attached to emerging market assets.

They also argue that, much more forcefully than was managed over the summer, officials at the Fed will insist that tapering the bond-buying programme is quite different from any move to raise the central bank’s key interest rate.

Many economists now expect the Fed to underline this point by lowering the unemployment threshold – currently at 6.5 per cent – at which it has said it will consider raising its key interest rate.

Such arguments do offer some comfort that the Fed’s second attempt at tapering, currently forecast for the first quarter of 2014, will have a more muted effect on financial markets.

that Janet Yellen, the incoming Fed chairman, will have to tread when the Fed chooses to taper remains a testing one.

PSU BANKS WRITE OFF LOANS

Data collected by Reserve Bank of India over a period of one year blows the lid off what goes as loan classification in banks. In a presentation at the annual bankers’ conference, RBI deputy governor K C Chakrabarty showed how banks have sacrificed over Rs 1 lakh crore by writing off bad loans to corporates, which is much higher than Union finance minister P Chidambaram’s farm loan waiver in 2008—a move that received flak from the industry. 

Under the Debt Waiver and Debt Relief Scheme, 2008, the Centre had waived off around Rs 60,000 crore to farmers. 

“In the last 13 years, banks have written off 1 lakh crore and 95% of these are large loans. Everyone talks of the farm loan write-off, but it is the medium and large enterprises segment that has a 50% share in NPAs,” said Chakrabarty. 

The deputy governor flayed banks for using ‘technical write-offs’ to reduce their non-performing assets (bad loans) over the years. Technical write-off is a process adopted by banks whereby they take a hit on their profits and stop including the defaulting loan in the list of those from whom repayments are due. It is called a technical write-off because although banks do not show these loans as receivables in their books, they continue to pursue recovery in courts or other forum. 

A technical write-off enables banks to claim that they do not have any bad loans on their books by fully providing for the loans from their earnings. It also reduces their tax outgo. 

Chakrabarty also raised the issue of restructured loans—advances where potential defaulters are given more time to repay without being called defaulters. “Restructuring of loans with retrospective effect has killed credit quality in banks,” he said. He warned banks that the leeway might not be available in future. 

“We must move away from restructuring, there should not be any category called restructuring. The moment it is restructured, it should be declared as NPA, there should not be any technical write-off… be prepared for that, unless you do that you might not be able to get out of the mess,” he said. 

RBI numbers showed that the banks added Rs 4,94,836 crore to their bad loans between 2007 and 2013. During the same period, they reduced NPAs to the extent of Rs 3,50,332 crore. This was possible because loans worth Rs 1,41,295 crore were written off and another Rs 90,887 crore were upgraded to repaying loans and Rs 1,18,149 crore was recovered from defaulters. According to Chakrabarty, after a technical write-off, there is no incentive to pursue recovery. 

The deputy governor said that in the case of large loans, there is no one who is accountable for monitoring the loan, as these are sanctioned by the board or a committee. “Between 2007-13, credit to 10 large corporate groups has more than doubled. We have seen that wherever credit growth has been higher, NPAs are also higher.”