Friday, January 29, 2010


The Dow/Gold Ratio is the ratio of the price of the Dow to the price of gold. More simply it is the number of ounces of gold required to buy one unit of the Dow.

While analysts are quick to proclaim the end of the 'Great Recession', its worth noting the continuing decade long bear trend in US equities.

Are we headed for another leg down in the equity markets ?
Valuations were running ahead of fundamentals and the current correction comes as no surprise!

The massive stimulus packages, the expansion in the US monetary base, and the FED buying almost $1 Trillion worth of US Mortgage backed securities, means that this was no 'garden variety recession'.

In the near term, the stock market sell off will result in a stronger USD, and this can put further pressure on the price of Gold.

However, patient gold bulls will be rewarded for their patience. This is one bullion market that you can't afford to miss!

Investors with a cash on hand can look forward to eventually increasing their equity market exposure, once valuations revert to more reasonable levels.

Friday, January 22, 2010


And then came the correction..........

Valuations are not just ''fairly priced'' in my opinion!!
Valuations are not cheap!
Sectors like Autos, FMCG and Engineering leave a wafer thin margin of safety for the investor.
As I have been saying in recent posts, it's definitely time to take some chips off the table.

Indian Stock Markets will have to cope with the current sell off in global equities as well as volatility and uncertainty as we head towards the Indian Union Budget.

The charts below show that equity returns in emerging markets like India are highly dependent on FII fundflows. The sustainability of these FII investments in emerging markets could face significant headwinds if the world economy heads for a ''double dip''

These charts are from the Business India Magazine - January 24, 2010.

Monday, January 18, 2010


The current dire straits of the budget crisis & the finances of the State of California is well known.

Here are some interesting links I came across -

Governor warns of deep fiscal crisis as he unveils California budget plan

What Happens When California Defaults?

California Housing Forecast for 2010: 5 Reasons why you Shouldn’t Buy a Home in California in 2010. 22 Percent unemployment and underemployment, home owned’ership, California Budget, Option ARMs, and Consumer Psychology.

California Budget Crisis Diaries: Redeem your IOUs, folks

ECB Says Greece Debt Crisis is Tiny Compared to California for the US

David Rosenberg on - Total unemployed relative to Total Job openings

Here's David Rosenberg on the total unemployed/ total job opening ratio:

''''Note that there are now a record 6.4 unemployed per job opening — double the highest level posted during the 2001 recession — which is a supply-demand mismatch in the labour market that is sure to accelerate the downtrend in wages (vivid in the NFIB survey too). ''''''

Also, here's what David Rosenberg had to say on the VIX

''''And the VIX index, at 17, is symptomatic of this high level of complacency — it was 22 a month ago and over 40 when the stock market was bottoming last March. The fact that investors are behaving as if there is minimal chance of any possible downside surprises occurring is perhaps the most glaring red flag over this bear market rally — from a contrarian standpoint, the widespread bullishness is bearish. ''''

Wednesday, January 13, 2010


Gold has had a fantastic last decade. There have been corrections that proved to be excellent 'buy on dip' opportunities

Gold prices have been volatile over this past week.
As I said in a post a few days ago, I am waiting for a pull back before doing any fresh buying.

L.N. Mittal of Arcelor Mittal on Investments in India, 8 January 2010

''We have not experienced this kind of growth and interest in investments in India before. neither the central government nor the states were prepared for such growth.''

The newspaper clipping is from the Economic Times newspaper, Mumbai- 8 January 2010.
Let's take a closer look at the issue.

Land acquisition delays, loads of red tape, pending environmental clearances.........and I think Mr. Mittal is quite exhausted and frustrated.














At the outset, I must say that I agree with Mr Mittal. The Indian government is unprepared for the size and scale of investments that are currently being proposed and planned.

To the credit of the Indian government, a lot has been achieved since the early days of liberalisation in 1991. Sectors like IT, Telecom, Banking and Autos have come a long way since 1991! Many Indian companies have emerged as Indian Multinational corporations

The key issue that the government needs to address now is - to set a strong foundation for the next stage of development.

Many policies and regulations must be put in place before granting any permissions to business houses to set up new businesses. The rights of local communities must be protected and they must be compensated for land surrendered, before 'big business' moves in.

Here are a few of the contentious issues that need to be addressed.

  • Land Acquisition rules: This has been one of the most debated issues that has haunted 'Special Economic Zones' (SEZs) from day one. Farmers and people residing in rural India are obviously not being adequately compensated for land surrendered. Politicians are misusing the sensitive issue of 'SEZ land acquisition' for election politics. Businesses commit to a project, only to realise later that they are just unable to secure the land for it. Rules regarding taxation / tax exemption of SEZs are also unclear. Then there is also the issue of the wasteful diversion of fertile agricultural land for SEZs.

  • Telecom Sector policy: Whether its GSM vs. CDMA, the telecom companies vs. TRAI, spectrum allocation disputes or the debate and commotion over 3G auctions, there's always some confusion over the rules and policies in the Telecom sector. 2009 witnessed a bloody price war in the mobile telephony space as a number of new companies launched mobile phone services in the domestic market. With 3G auctions coming up, it's about time that the Telecom ministry clarify and set straight all regulations required for companies operating in this space.

  • Environmental Clearances: Mining projects, petro chemical complexes and offshore drilling aren't exactly environmentally friendly industries. They are industries that are responsible for a lot of environmental damage, but on the flip side, they also provide numerous employment opportunities to people across the country. The government must encourage the setting up of economic centres and industrial townships across the country, to prevent overcrowding of major cities (by people from rural India seeking employment) and thereby ensure a more equitable distribution of wealth and employment opportunities. At the same time it's important to regulate effluent treatment practices of companies and the government must ensure that its rules and regulations are in place before companies set up shop.

  • Power Sector: Despite the best efforts of public sector behemoths like NTPC, India remains a country that suffers from acute power shortages, with many states overdrawing from the national power grid. Recent initiatives like the Ultra Mega Power Projects (UMPPs) are still at the foundation stage and in many cases are grappling with land acquisition issues and fuel sourcing issues. Before these new capacities come on stream, the government will have to ensure that the transmission and distribution arms of the Power sector continue to invest in building up required infrastructure.

  • Oil & Gas Sector : Whether its the Ambani vs Ambani KG basin gas dispute or the Cairn India Rajasthan cess dispute or the gas pipleine policy, there are many grey areas in this sector. Is natural gas pricing going to be partially regulated? Will sectors like Fertilizers and Power generatioin be given predetermined gas allocations? Which regulatory authority will be the final forum for settling disputes regarding the laying of gas pipelines?

  • Railways: The Railway Container Freight sector continues to suffer from the after affects of the global meltdown of 2008-09. Private sector companies are just unable to compete with the estabilshed incumbent - The Container Corporation of India, a listed public sector enterprise. Delays and disputes over setting up inland container yards on land owned by the Indian Railways remain unresolved. Then of course comes the ambitious 'Rail Freight Corridor Project'. Here too, land acquisition issues and the ever increasing implementation cost structure and funding issues have resulted in this project being stalled at the drawing board stage for quite a while now. Recently proposed investments by the Japanese government too are at a very very early stage.

It's obvious that a number of issues and policies need to be sorted out before we invite more foreign direct investment into India

A lot needs to be done before India embarks on the next stage of her economic growth. It's not going to happen overnight.It will be gradual and quite chaotic, but we will eventually get there.

Both businessmen and stock market investors need to understand these and other issues before commiting to mega projects or long term investments in India.

Tuesday, January 12, 2010


At a time when many analysts and experts are advising clients and investors to increase ‘market exposure’ and take more risks I advise you to do the exact opposite.

Now is the time to step out of risky investments and look to minimize portfolio volatility.


Here’s how you can sum up the true state of the world economy

= Uncertain & Unstable & Volatile.


Here’s my 2010 check list


Hope springs eternal: Now that equities have staged massive rallies off their panic lows in March 2009, the performance chasing analysts continue to push more ‘buy’ recommendations to investors, even when the current risk reward ratio is clearly not in their favour.


Government Support: has enabled the world economy to survive a deflationary spiral that would have triggered another great depression…….or so they tell us. What we now have instead, is a global economy that is addicted to government stimulus packages, bailout packages and ever increasing government debt levels and deficits.

How costly will continuing stimulus packages be for emerging markets in 2010, as export driven Asian economies struggle with slowing consumption in the developed world?


Stimulus Packages: continue to strain government finances. The fragile global economic recovery is now becoming dependent on these stimulus packages that are artificially preponing demand and artificially propping up consumption. This is leading to a misallocation of resources and resulting in rising commodity prices and a buildup of excess manufacturing capacity.


Fed exit strategy: I do not think that the FED will be increasing rates anytime soon.

Firstly, the appetite for US Treasury Bonds remains strong. Why raise rates if the market doesn’t force you to!

Secondly, given the large amount of debt issuance lined up for 2010, why would the Fed raise rates now?

Lastly, can the Fed and the Treasury stop supporting the US mortgage market now?

As a student of the Great Depression, Bernanke knows that any further fall in home prices would deal a lethal blow to the 'nascent recovery'. So expect Freddie Mac and Fannie Mae to get unlimited amounts of support.

Stemming foreclosures and reducing the inventory of unsold homes is key to building confidence levels of the US consumer.


Banking: The only sector that is growing profitably again! But wait…......weren’t these guys the largest beneficiaries of the bailouts in 2008-09!

Then they rushed to reapy TARP money, so that they could start issuing bonuses again!

As for sound lending or sound accounting practices or sound banking practices, don’t expect anything to change anytime soon.


Employment and Capital Investment: These are two factors that have failed to recover and support this ongoing recovery and bullish sentiment. Continuing uncertainty and a total lack of confidence has resulted in businesses postponing fresh hiring and many capex plans have been shelved for now.

As for government statistics; well you must take them with a pinch of salt. Unemployment statistics, conveniently exclude individuals from the labour force, because they ‘may not be actively searching for a job’. These are people who are actually struggling to find a job in a terrible job market……..and yes they are UNEMPLOYED!


Expert Views:

David Rosenberg – says we are witnessing a secular shift in consumer behaviour and spending patterns in the US. According to him, ‘frugality’ is here to stay. This will ensure that the deleveraging of US consumer debt will continue unabated, despite the reflation efforts of the FED & US Treasury!

Continued inflows to fixed income investments and continued outflows by retail investors from US equity funds are also signs of a changing investor mentality.

He also labels the government’s efforts to pre pone consumption via the cash for clunkers plan and housing tax credits as ‘’bribes’’ to force consumers to start spending again.

He advises investors to take a more cautious view and favours a conservative income generation investment policy to minimize portfolio volatility and risk.

Government stimulus and inventory restocking have been key drivers of growth in the US economy and David Rosenberg believes that earnings estimates for FY 2010-11 are far too optimistic!


Ruchir Sharma (head of emerging markets at Morgan Stanley Investment Management) – says that ‘we are all entitled to our own opinions, but not to our own facts’, and advises investors to be wary of the herd. The world economy suffers from excess leverage in the financial system, excess manufacturing capacity and excess leverage on consumer balance sheets. ‘A growth relapse is the true contrarian view to engage in 2010.’ Risks include disappointing announcements from China or a double dip in the US! He says the most money is indeed made or saved by staying away from the herd.


Chris Laird: the editor of The Prudent Squirrel Newsletter is also cautious. He advises everyone to avoid being swept away by the information overload in the financial media, and avoid fresh risk taking. His track record over the past few years has been impressive!


US Recovery: The current rebound will go down as the weakest recovery on record going by the Recovery to loss ratio = Gain in the first year or recovery in real GDP / peak to trough loss during the recession. Q4 GDP will be boosted by inventory restocking and a low year on year base effect. How will the economy cope when government support is withdrawn…..if it can be withdrawn?


US domestic finances and the November 2010 elections – A number of US states continue to struggle with falling government revenues and ever increasing expenses. California is a prime example.

The world’s 8th largest economy has suffered a massive real estate collapse, record debt levels and is in need of a bailout from Washington.

Thing is, they are not the only guys queuing up! And with elections coming up later this year, can these states resort to cutting government spending?

Politicians are the same everywhere – expect election politics to kick in soon enough.


Government Debt: A friend of mine recently asked me if there is actually some limit on the amount of debt that a government can issue before it becomes excessive, bringing the whole system down?

Here are two quotes that answer the question:

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as the final and total catastrophe of the currency system involved.”

- Ludwig von Mises, Human Action (1949).

“You have only to find a way to multiply your creditors by the cube and pay them by the square, out of their own money. The fatal weakness of the scheme is that you cannot stop. When new creditors fail to present themselves faster than the old creditors demand to be paid off, the bubble bursts.”
--Garet Garrett

Dubai, Greece, Ireland and Spain are already under severe strain as they struggle to get back on their feet. The ‘world reserve currency’ country -the U.S.A. continues to add on to its debt, as investors continue to lap up US Treasury bond issues.

No one knows what the limit is or when we will get to it – but all these governments are pushing their luck!


GOLD: An environment of uncertainty, instability & volatility created a perfect storm for Gold in 2009. These are bigger drivers for gold than the ‘inflation’ argument as of now.

While I think that the massive wealth destruction of the last few years will delay an eventual return of inflation, massive government intervention has created a ‘feel good…back to normal’ environment once again.


Question is – what normal are we talking about?

Expanding consumer leverage & consumption, permanently rising house prices and exploding mortgage derivative markets were never ‘normal’

Falling personal income, increased working hours with less pay, and continued weakness in the US real estate market are the new reality.

Gold prices have now stabilized in the $1080 - $1150 range. The year end USD rally has stalled for now. I will wait for a buying opportunity in gold, which appears likely in the event of a stock market crash, which would trigger a flight back to the USD!


Strategy for 2010

A genuine recovery vs. a recovery on life support – Understanding this difference is key!

Continue to book profits in equities as the current margin of safety is just not adequate.

Beware of sectors that have been the biggest beneficiaries of stimulus packages, example the auto sector.

Hold on to positions in Gold, and wait for a buying opportunity. Don’t forget that Gold was the top performing asset class of the last decade!


The US Dollar: I’m a long term dollar bear. In 2010, I expect to see a pullback in the USD when the equity markets correct. There are far too many USD bears out there and one can expect the usual flight to USD safety when markets correct. A rebound in the USD would also enable US Treasury Bond issues to sail through smoothly.


Complacency and overconfidence will be key factors that punish the unprepared investor this year. The VIX (Volatility index) is at record lows. Expect volatility to make a comeback soon, once investors realise that we aren’t out of the woods as yet!


The Eurozone – will face quite an eventful 2010. Weaker economies like Greece, Ireland, Spain, and yes even the UK are struggling to reduce deficits and support their local economies. Stronger economies like Germany will be forced to lead bailouts or support packages for their weaker neighbours if things take a turn for the worse.

The EURO could have a volatile time in 2010 if sparring members refuse or delay support packages for weaker members.


Commercial Real Estate: will continue to haunt banks that are overexposed to the sector. Office Rents continue to decline, and rising vacancies will continue to stress out balance sheets of companies in the sector.

US Home Prices: I still believe that we will see lower prices next year. The resetting of Adjustable Rate Mortgages ( more on this in subsequent posts) and more foreclosures in 2010 will delay any recovery in this sector.


Emerging Markets (including Indian Equities): The ‘decoupling’ theory is resurrected again, after the correlations were crushed in the crash of 2008 -09.

Export driven economies in Asia are still dependent on customers in the western world. Their stock markets are still dependent on foreign institutional investors (FIIs). These are the same guys who stormed out in panic during the crash in the first quarter of 2009.

Conclusion: It’s time to book profits or at least take some chips off the table.


Indian Equities have risen along with other emerging markets. Valuations leave no room for error. Capital Investment has started to increase gradually, but companies are still cautious on the sustainability of the current recovery. Sectors like FMCG and Autos are at lifetime highs. Lock in some profits now!


On the buy side, one sector that I’m looking into is the Telecom Industry. Valuations have been slashed after the price war of 2009. Uncertainty over the upcoming 3G rollout, continuing capital expenditure and shrinking margins has frightened investors. As a disclosure, I must say that I have recently become a shareholder of Bharti Airtel. Of the listed telecom companies, Bharti Airtel has the best balance sheet and the first mover advantage! For anyone thinking of buying in right now, I must warn you that the stock is a high risk high return proposition. We will undoubtedly see at least a year of very poor profitability until the price war stabilizes. We are heading towards a forced consolidation so it’s going to get tough.

All in all, I think Bharti Airtel is the best company if an investor must take any exposure to the Telecom space in India.


To conclude, I think that investors should look for sustainability over returns in 2010.

  • Gold bugs should be patient and wait for a pull back before buying in agin.
  • Don’t get caught unawares by a massive equity market selloff when it comes along!
  • Know your investment risk profile, and the volatility that you are able to cope with.
  • As David Rosenberg says, look to minimize portfolio volatility.
  • No one knows when the market will finally turn. Just like 2007-08 it will do so without any warning. The global economy faces strong headwinds in 2010, so be prepared for volatile times, even though the VIX is currently sinking to new lows.
  • It’s not a time to be buying now. It is a time to sell and book profits.

Wednesday, January 6, 2010


Well i'm back again!
Before I begin posting new stuff for 2010, let's just take a quick look back at investment returns of the last decade!

Here's a chart from Jesse's Café Américain. Even as Gold and Silver have been star outperformers, its just amazing how little coverage they get on CNBC!

Chart of the day covers a multi decade DJIA return chart.

Clearly the 1980's and 1990'S were years of blockbuster returns in US equities.
Expert stock pickers like Warren Buffett generated market beating returns over this period.
Looking at returns over the 1960's and 1970's is almost frightening! Can the current ipod-blackberry-google search generation cope with it!
It's happened before, but can we cope with marginal returns while servicing a massive debt overhang this time round?

The Indian equity markets had a fantastic last decade.
Just a few years prior to 2000, India's manufacturing sector was in bad shape. Over the last decade, these same manufacturers have bounced back - cutting costs, improving efficiency and product quality.

Companies in the IT services space have also survived the 2000 IT/ dotcom meltdown, and have become globally recognised franchises.
The current decade will need record investments in infrastructure development if India is to emerge as a ''superpower'' by 2025!!
Reducing income disparity and improving the standard of living of people in rural India are also crucial to India's future development.

Lastly, I'd like to draw your attention to the CBOE VIX volatility Index.
Jesse's Café Américain has a good chart on the VIX.
We are not out of the woods yet! The world economy is getting ''addicted'' financial stimulus packages and ever expanding government debt and deficits.
Those looking for jobs and those trying to hang onto jobs they ''despise'' are clearly not as optimistic as equity market analysts are.
I will be putting up a post on ''what to look forward to'' and ''what to look out for'' in 2010. I'm working on it now, but it should be up in a couple of days.