Monday, 31 March 2014
Sunday, 30 March 2014
IS UNITED STATES HEADING FOR A BIG BEAR MARKET ?
here is a great deal of concern surrounding the outlook for American equity markets. The markets are up nearly 200 per cent from their low of 666 in March 2009, and many credible and serious market observers are expecting a big bearmarket to hit US equities anytime now. The bears are making the argument that valuations are very high in the US on any valuation measure using normalised earnings and profit margins. Current price-to-earnings (P/E) ratios look reasonable since the denominator is based on peak profit margins, which are unlikely to be sustained.
The bears point to worrying signs in terms of sentiment. Margin debt is at an all-time high; investment advisor bullishness is very elevated; and we see bubble-like behaviour in initial public offerings and mergers for new technology companies. Flows into equities have also started to pick up. The bears also make the point that we continue to live in a very artificial environment, driven by super-easy US Federal Reserve policy. As Fed policy normalises - the path and timing for which are now clear - we will see market disruption. One cannot normalise a hyper-stimulative policy environment without market casualties.
It is notoriously difficult to time bear markets, but it is interesting to see how the US markets look on some simple indicators. The US markets remain the most important, and any significant decline there will have consequences for equity markets globally.
In an attempt to understand the vulnerability of the US equity markets, the most important variables to assess are monetary conditions. Tight money conditions are a clear negative for equities. Monetary tightening leads to an economic slowdown and has a consequent impact on corporate earnings. High interest rates will reduce the relative attractiveness of equities as an asset class and also disproportionately reduce the value of any long-duration asset such as equities (through a higher discount rate). Slowing money supply growth (a normal consequence of a tight monetary policy stance) will reduce the surplus liquidity that can flow into financial assets from the real economy.
How should one measure monetary conditions? Which measures have some predictive power vis-a vis equities? BCA has done some research on this topic and has come up with a few key variables.
The slope of the yield curve is a simple and effective way to judge the monetary stance; a flat to inverted slope implies tight policy. The spread between the 10-year bond yield and the three-month Treasury bill is probably the best way to measure the yield curve. If this spread is negative or zero, that is normally a good leading indicator of market vulnerability. Another equally effective measure would be to look at the gap between five-year bond yields and three-year bonds.
The level of real short-term interest rates is another effective tool to assess monetary conditions from an equity market perspective. In general, real short-term rates will need to be strongly positive before the onset of any bear market. Though an imprecise indicator, real short rates above two per cent seem to have the ability to cause market damage.
Another tool investors may use to judge monetary conditions is a type of Marshallian K construct: comparing the growth of some form of money supply (like M2) to nominal gross domestic product (GDP). The logic is that whenever money supply growth lags nominal GDP, liquidity will be sucked out of financial assets for real economy use. The reverse flow from the real economy into financial assets occurs when M2 is growing faster than nominal GDP. As BCA points out, the gap between growth in M2 and in nominal GDP turned negative before almost every bear market prior to 1980. Though this signal has been less effective in recent years, it is still something to keep track of.
Currently, none of the three monetary indicators mentioned above shows any signs of impending market stress. The yield curve is positive, real short rates are negative, and money supply growth continues to exceed nominal GDP. There is nothing on the monetary side that should worry market participants. Yes, the Fed has begun normalising monetary policy, but raising rates from very low levels when economic growth is improving should not trigger a bear market. Market volatility and disruption, yes - but bear market, no.
Valuation is the other obvious indicator that judges a market's vulnerability to a bear phase. Valuation indicators, whether they are simple P/E multiples or even the cyclically adjusted P/E, have very little use for timing equity bear markets. Valuation overshoots can persist for long periods of time. Valuations are, however, useful in determining prospective returns. Buying a market when P/E ratios are high will generally deliver lower 10-year returns than buying when P/Es are low. There is also a loose relationship between the extent of overvaluation and the severity of the subsequent bear phase. While equity markets in the US are no longer cheap, they are not at an extreme either. Current trailing P/E ratios are within 10 per cent of long-term averages. Stocks also look very cheap if one uses any interest rate-based valuation tool, which reflects the extent of overvaluation in fixed-income markets. As discussed, valuation is not useful for timing - but apart from that, except for some technology and biotechnology subsectors, broad market valuation does not seem to be at such an extreme as to cause worry.
Technical indicators - such as sentiment, breadth and momentum - can be important in trying to understand market vulnerability and are useful at market turning points. Current technical readings are mixed - the market is above its 200-day moving average, but sentiment seems elevated with investment advisor bullishness and margin debt at an extreme. However, given the amount of discussion that is taking place on bubble-like conditions in financial markets, it does not seem that we are in the midst of euphoria. Nor are equity market flows strong enough.
US equity markets will eventually have a significant bear market. All markets are eventually cyclical, but there seems to be no reason to feel that it is imminent. A shock independent of monetary policy can induce a market correction, as can a serious economic recession - but the first is not forecastable and the second seems unlikely in the short term. Most economists expect the US economy to actually accelerate from here, not fall into another recession. A significant decline in corporate earnings can also be another trigger. However, absent a recession, despite the calls for regression to the mean in terms of profit margins, one cannot see how earnings in the US can decline enough to trigger a bear market. Recent corporate earnings have been weak, but they are not declining.
If the US equity markets hold, that will hopefully provide an enabling backdrop for equity markets across the world.
The bears point to worrying signs in terms of sentiment. Margin debt is at an all-time high; investment advisor bullishness is very elevated; and we see bubble-like behaviour in initial public offerings and mergers for new technology companies. Flows into equities have also started to pick up. The bears also make the point that we continue to live in a very artificial environment, driven by super-easy US Federal Reserve policy. As Fed policy normalises - the path and timing for which are now clear - we will see market disruption. One cannot normalise a hyper-stimulative policy environment without market casualties.
It is notoriously difficult to time bear markets, but it is interesting to see how the US markets look on some simple indicators. The US markets remain the most important, and any significant decline there will have consequences for equity markets globally.
In an attempt to understand the vulnerability of the US equity markets, the most important variables to assess are monetary conditions. Tight money conditions are a clear negative for equities. Monetary tightening leads to an economic slowdown and has a consequent impact on corporate earnings. High interest rates will reduce the relative attractiveness of equities as an asset class and also disproportionately reduce the value of any long-duration asset such as equities (through a higher discount rate). Slowing money supply growth (a normal consequence of a tight monetary policy stance) will reduce the surplus liquidity that can flow into financial assets from the real economy.
How should one measure monetary conditions? Which measures have some predictive power vis-a vis equities? BCA has done some research on this topic and has come up with a few key variables.
The slope of the yield curve is a simple and effective way to judge the monetary stance; a flat to inverted slope implies tight policy. The spread between the 10-year bond yield and the three-month Treasury bill is probably the best way to measure the yield curve. If this spread is negative or zero, that is normally a good leading indicator of market vulnerability. Another equally effective measure would be to look at the gap between five-year bond yields and three-year bonds.
The level of real short-term interest rates is another effective tool to assess monetary conditions from an equity market perspective. In general, real short-term rates will need to be strongly positive before the onset of any bear market. Though an imprecise indicator, real short rates above two per cent seem to have the ability to cause market damage.
Another tool investors may use to judge monetary conditions is a type of Marshallian K construct: comparing the growth of some form of money supply (like M2) to nominal gross domestic product (GDP). The logic is that whenever money supply growth lags nominal GDP, liquidity will be sucked out of financial assets for real economy use. The reverse flow from the real economy into financial assets occurs when M2 is growing faster than nominal GDP. As BCA points out, the gap between growth in M2 and in nominal GDP turned negative before almost every bear market prior to 1980. Though this signal has been less effective in recent years, it is still something to keep track of.
Currently, none of the three monetary indicators mentioned above shows any signs of impending market stress. The yield curve is positive, real short rates are negative, and money supply growth continues to exceed nominal GDP. There is nothing on the monetary side that should worry market participants. Yes, the Fed has begun normalising monetary policy, but raising rates from very low levels when economic growth is improving should not trigger a bear market. Market volatility and disruption, yes - but bear market, no.
Valuation is the other obvious indicator that judges a market's vulnerability to a bear phase. Valuation indicators, whether they are simple P/E multiples or even the cyclically adjusted P/E, have very little use for timing equity bear markets. Valuation overshoots can persist for long periods of time. Valuations are, however, useful in determining prospective returns. Buying a market when P/E ratios are high will generally deliver lower 10-year returns than buying when P/Es are low. There is also a loose relationship between the extent of overvaluation and the severity of the subsequent bear phase. While equity markets in the US are no longer cheap, they are not at an extreme either. Current trailing P/E ratios are within 10 per cent of long-term averages. Stocks also look very cheap if one uses any interest rate-based valuation tool, which reflects the extent of overvaluation in fixed-income markets. As discussed, valuation is not useful for timing - but apart from that, except for some technology and biotechnology subsectors, broad market valuation does not seem to be at such an extreme as to cause worry.
Technical indicators - such as sentiment, breadth and momentum - can be important in trying to understand market vulnerability and are useful at market turning points. Current technical readings are mixed - the market is above its 200-day moving average, but sentiment seems elevated with investment advisor bullishness and margin debt at an extreme. However, given the amount of discussion that is taking place on bubble-like conditions in financial markets, it does not seem that we are in the midst of euphoria. Nor are equity market flows strong enough.
US equity markets will eventually have a significant bear market. All markets are eventually cyclical, but there seems to be no reason to feel that it is imminent. A shock independent of monetary policy can induce a market correction, as can a serious economic recession - but the first is not forecastable and the second seems unlikely in the short term. Most economists expect the US economy to actually accelerate from here, not fall into another recession. A significant decline in corporate earnings can also be another trigger. However, absent a recession, despite the calls for regression to the mean in terms of profit margins, one cannot see how earnings in the US can decline enough to trigger a bear market. Recent corporate earnings have been weak, but they are not declining.
If the US equity markets hold, that will hopefully provide an enabling backdrop for equity markets across the world.
Friday, 28 March 2014
ONE LINERS FOR TRADERS
- Let winners run. While momentum is in phase, the market can run much further than might be expected.
- Corollary to that rule: Do not exit winners without reason!
- Be quick to admit when wrong and get flat.
- Sometimes a time stop is the right solution. If a position is entered, but the anticipated scenario does not develop then get out.
- Remember: if one thing is not happening the other thing probably is. Historically, this has never been good for me…
- Be careful of correlations. Several positions can often equal one large position bearing unacceptable risk. Please think.
- I am responsible for risk management, money management, trade management, doing the analysis work and putting on every trade that comes.
- I am not responsible for the outcome of any one trade. Markets are highly random. I do not have a crystal ball. I am not as smart as I think I am.
- Risk management is the first and last responsibility. I can make almost any mistake and be ok as long as I do not violate my risk management parameters.
- Opportunity comes every day. Do not neglect the work. Must do analysis every day.
- Opportunity comes every day. Get out of poor positions. Move on.
- I am a better counter trend trader than a trend trader. Sometimes the crowd is right, and they will run me over at those times if I’m not quick to admit I’m wrong.
- If you’re going to do something stupid, at least do it on smaller size.
Thursday, 27 March 2014
LESSONS FOR MR. MODI FROM MRS. INDIRA GANDHI
Marginalised by the Bharatiya Janata Party (BJP), former Union minister Jaswant Singh has claimed that the current decision-making in the party reminded him of 1975, Indira Gandhi’s Emergency era. A more apt comparison might be made with the years preceding the Emergency when Gandhi split her party to create a new Congress in 1969.
Gandhi was then fighting a powerful group within the Congress known as the “Syndicate” that was opposed to her.Narendra Modi also appears to be struggling with what can be termed the “Old Guard”. Just as the Congress became synonymous with Gandhi after the party split – literally as Congress (Indira) – the BJP is fast becoming synonymous with Modi. Gandhi made the institutions of the Congress irrelevant, as Modi seems to be doing in the BJP.
If Gandhi was likened to goddess Durga after the Bangladesh war, Modi is being likened to lord Shiva (ironically, the god of destruction), with Hindutva supporters adapting the chant “Har Har Mahadev” – to “Har Har Modi“. The slogan may be no accident considering Modi deliberately chose the city of lord Shiva, Kashi (Varanasi), to establish his credentials as leader of the nation. It was withdrawn, however, when it upset religious Hindus – underlining the chasm that exists between Hindu religiousness and Hindutva as a political ideology.
However, there are crucial differences between Gandhi’s reshaping of her party in the face of opposition from the older leaders of her party and Modi’s latter-day attempt to do this in the BJP.
Gandhi established her democratic credentials as prime minister in 1967, through an election in the Congress Parliamentary Party – winning 355 votes against Morarji Desai’s 169. Modi is yet to go through that baptism and was anointed prime ministerial candidate through more opaque processes.
Gandhi fought a bitter but democratic battle within the party for her social agenda before she was expelled from the party by its president, S Nijalingappa, forcing a Congress split. Modi has fought no such battle of ideas in eliminating potential challengers in his party.
Gandhi’s 10-point programme, announced in May 1967 at the All India Congress Committee meeting at Bangalore, was radical for its time – it proposed nationalisation of banks and insurance, state control over import and export trade, ceiling on urban property and income, curbs on business monopolies and concentration of economic power, public distribution of food grain, rapid implementation of land reforms, provision of house sites for the rural poor and, most importantly, abolition of privy purses of erstwhile princes. It was a socialist programme with a focus on distributive aspects of wealth. Modi comes with a corporate-funded and corporate-inspired agenda of growth premised on alienation of public resources to private entrepreneurs and no promise of distributive justice.
Gandhi had an inherent advantage in reshaping the Congress and consolidating it because she began to take on the older leaders in the party after she had become prime minister. Being in government, she held a monopoly over patronage distribution. Her victory in the 1971 war also helped reinforce control over the party in the 1972 elections.
Modi, however, is putting together a party of loyalists even before he has come to office. They include many opportunists salivating over the prospect of loaves and fishes. Anyone who seems to have the slightest chance at the hustings – from rank opportunists opposed to the party till yesterday to fading film stars – is welcome.
Consider the two states that hold the key to the BJP’s prospects of forming the next government. Nearly 26 outsiders have been fielded as Lok Sabha candidates in Uttar Pradesh. The number of outsiders in Bihar is 10 (one new entrant, two independent MLAs and seven defectors). In other states, candidates with a proven record have been sidelined because their loyalty to Modi is in doubt. Thus, Harin Pathak, seven-time MP and an L K Advani loyalist, was cast aside in favour of Bollywood’s funnyman, Paresh Rawal in Ahmedabad East. In Barmer, Sonaram, a defector from the Congress who was defeated once in the parliamentary election by Jaswant Singh’s son, is being fielded instead of Jaswant Singh. In Sikar, three-term MP and former Union minister Subhash Maharia was ignored in favour of a Ramdev acolyte, Swami Sumedhanand, who is from Haryana. The story is repeated in constituencies across Madhya Pradesh, Punjab and Delhi.
The deliberate humiliation and marginalisation of leaders critical of Modi are evident in the way senior leaders have been forced to change constituencies, their candidature not announced in time, or denied the opportunity to contest altogether. Adding insult to injury, Modi’s supporters have publicly advised them to grin and bear it.
Such is the surveillance of the “thought police” in Modi’s dystopian new BJP that even party president Rajnath Singh had to face the ire of Modi loyalists for tweeting, “Ab ki bar, Bhajpa Sarkar(This time, a BJP government)”. Barely 33 minutes later, he modified it to “Ab ki bar, Modi Sarkar(This time, a Modi government)”.
In confronting his own “Syndicate” within the BJP, Modi has the advantage that his party president is an acolyte. He also has the additional advantage that, despite apprehensions, the organisation that provides the cadre to the BJP for elections, the Rashtriya Swayamsevak Sangh (RSS), has thrown its weight behind him.
Unlike Indira Gandhi, Modi, therefore, does not need to split his party. It is enough to relegate contenders to the margins. The RSS, led by a weak and confused leader like Mohan Bhagwat, will not be able to check Modi in this. In one breath he blesses Modi as the BJP’s prime ministerial candidate, in the next, Bhagwat cautions against promoting a personality cult. Modi could well argue after the elections that, like the BJP, the RSS too needs a generational change and advise an ageing Bhagwat to retire. If he succeeds, Modi’s control over the BJP and the RSS would be complete. The big assumption here, of course, is that those opposed to Modi will roll over and oblige.
Wednesday, 26 March 2014
RELIANCE INDUSTRIES UNDER SCANNER
Supreme Court Scanner on Reliance Industries money laundering charges
26 March 2014 -
The Supreme Court today asked the government to file a report on the steps it has taken after a Singapore High Commission letter asking for an investigation into alleged investment of Rs 6,500 crore into four RIL group companies by Bio Metrix Marketing and Strasbourg Holdings in Singapore.
In August 2011, the Indian High Commission in Singapore had written a letter to the government asking an investigation into investments made from “a one-room defunct company in Singapore”. During the hearing of the public interest litigation over Reliance KG-D6 case, the bench asked the government to file a report as to what was done pursuant to the High Commission letter.
The bench said, “We want to know what inquiry was done and what was done about the matter after the letter from the Indian High Commission.” Reliance Industries Limited (RIL) had last month (February 27), rejected allegations of making foreign direct investments (FDI) in certain Indian companies through the Singapore-based firm Biometrix.
“The investments by Biometrix were open, transparent and perfectly legitimate transactions in full compliance with the extant regulations. These investments in the Indian companies were made by Biometrix out of loans raised from ICICI Bank, Singapore branch. ICICI Bank has confirmed this fact to the regulators. Regulatory authorities have fully investigated the matter and have found no substance in the allegations of money laundering. The insinuation that this money was from “gold plating” from KG-D6 is completely irresponsible and false,” the statement added.
The RIL statement further added that the allegations made by Prashant Bhushan of Aam Aadmi Party have been previously made in judicial proceedings in the Delhi High Court and have been appropriately responded to.
“Our legal advisor, Atul Dayal, was neither the owner nor director of Biometrix, and Biometrix has filed its balance sheets and income tax returns in each year with the regulatory authorities in Singapore. The allegations that ill-gotten laundered money or profits have either been made or that these have been deposited in the accounts of Mr.Mukesh Ambani through Singapore or otherwise are false and are treated by us with the contempt that they deserve,” the RIL statement said.
Prashant Bhushan appearing for the petitioners Common Cause , today pointed out that this is a company with no assets, no equity and does not file an income tax returns in Singapore claiming to be a small company. Yet, this huge investment by this company of Rs 6530 crores is the single biggest FDI into India from Singapore.
“The High Commission had stated that all this money has gone into Reliance group of companies in India with the major chunk going to Reliance Gas Transportation Infrastructure Ltd which is a company 100% owned by Mukesh Ambani personally,” he added.
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