INDIAN EQUITIES - LOOKING BACK AT 2011

Here are some articles from last year that I think are worth a read.

Indian Equities have been faced with a toxic combination of Policy inaction, high interest rates, a very weak Indian Rupee and waves of instability from western markets, primarily the EU.

The articles below provide some interesting views on the Outlook for 2011. Mukul Pal's contrarian outlook, highlights the point that beaten down sectors that have been written off by Mr. Market could surprise us in 2012!

INDIAN RUPEE : FOREX FLUCTUATION & INDIAN POLICY REFORMS

Here is a good article from today's Business Standard Newspaper in Mumbai.
Rupee fall pares India Inc's profit by a fourth in Q2

If the weakness in the INR continues, upcoming FCCB redemptions, USD denominated foreign Currency borrowings and the rising cost of imported raw materials will continue to add to the woes of Indian Corporates in the results of the third quarter.

Many blame the INR weakness on FII selling in the Indian Equity markets.
While FII selling has played its part, I feel the ongoing Government policy malaise and concerns over the Government's Fiscal Deficit continue to weigh down the INR.
Currency downgrades by the Rating Agencies will add to the downward pressure on the INR.

Also, it's about time that the Indian Government gets down to implementing many long delayed reforms.

Some sectors in dire need of reforms
POWER SECTOR - Poor financial health of State Electricity Boards (SEBs) is forcing them to resort to  load shedding of power even as Power producers are left with surplus power that they are unable to sell. These SEB's must move towards a market determined pricing of power sold by them to distribution companies.
Merchant Power sales and Power trading are also facing many unresolved policy issues.
Under construction Ultra Mega Power Projects also face uncertainities due to fuel linkages (read: Coal allocation issues and royalty issues on Coal imported from Indonesia).
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MINING SECTOR - Confusion over a proposed Mining Tax, profit sharing with locals displaced by Mining projects, Land acquisition delays and mining scams and corruption have delayed many Mining & Smelter projects.
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FERTILIZER SECTOR - Partial implementation of the Nutrient Based Subsidy Scheme (NBS) and the delays in decontrol of Urea pricing have compounded the problems of the sector. Heavily subsidised Urea fertilizer has resulted in farmers opting to use Urea over DAP fertilizer. Excessive use of Urea has upset the balance of soil nutrients and has thus resulted in lower crop yields.
Any further delay in decontrolling Urea fertilizer pricing will add to government subsidies as the government continues to import Urea shortfall from overseas. A weak INR will add to the cost of imported Urea fertilizer.
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TELECOM SECTOR - The ongoing 2G scandal and corruption cases continue to dominate news in the telecom sector. What the government must take a look at is reforming regulations that will promote consolidation in the Telecom sector. Recent issues of 3G roaming should also be clarified by the TRAI and the government, to avoid any further uncertainty in this sector.
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AVIATION SECTOR - A combination of ''below cost '' fares by Air India,  record high ATF prices, ultra competitive air ticket prices, and record high debt of the airlines themselves has resulted in some serious structural problems in the Indian Aviation sector. FDI limits in Indian Aviation will have to be liberalised and a more viable tax structure on ATF will have to be worked out, if the existing carriers are to survive as going concerns. Perhaps the government will have to look at the development of "Low cost airports'' from which the Low Cost Carriers can operate, given the expensive Landing and Parking Costs at the country's main airports.
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OIL SECTOR - Massive delays in implementation of a clear and viable Gas Pricing policy is delaying further development of Oil and Gas Blocks in the KG Basin. Until this vital issue is resolved, Fuel Linkage issues of Power & Fertilizer Plants will not be resolved. The longer it takes for this Gas to reach the market, the more will be the delays of construction of new Power and Fertilizer Plants.
Also the" retail fuel pricing - under recovery problem" of the Oil Marketing companies (OMCs) remains unresolved. Massive subsidies on retail fuels sold by the OMCs have weakened their finances over the last decade.
A weak INR+ high Crude Oil price is adding to the under recovery burden of the OMCs.
If the government fails to move to a market determined pricing mechanism for Retail fuels soon, these OMCs will soon need to be bailed out by the government.
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All in all, it's about time that the government takes a step forward, and gets downto resolving these 'bottle neck' issues that are plaguing the Indian Economy at the moment.

If some of the supply side issues are worked upon, then perhaps the subsequent drop in inflation and an improvement in the government's fiscal deficit targets, will help the INR to regain some lost ground.

INDIAN RUPEE - WEAK ASIAN CURRENCY

The Indian Rupee has joined its Asian peers and has weakened against the USD over the last few  months.

A weak Indian Rupee will make India's Crude Oil imports more expensive and thus add to inflationary pressures.
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A weak Indian Rupee will also hurt the profitability of Indian Corporates with large USD denominated borrowings.
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On the other hand, a weak Indian Rupee will boost the profitability of Indian IT exporters and export oriented Crude Oil Refineries

Watch this space!!

GOLD : Overextended after a massive run : more volatility to come

After testing $1900, gold prices have corrected sharply. In the near term prices continue to remain overextended, well above supporting trendlines at $1640.

I continue to remain a long term bull, but would once again remind readers that in the short term, gold prices will continue to be volatile and reacting to options expiration and the FED's Jackson Hole meeting at the weekend.

Here is a fantastic chart from Jesse's Café Américain - a super site for all gold related news and excellent unbiased market analysis.

MARKET UPDATE: THESE ARE CRAZY DAYS

Just a quick post today before I put up some detailed analysis soon.

There's so much happening in markets these days - Debt Ceiling, US AAA downgrade, Equity Market crashes, a really manic VIX (Volatility S&P500 ^VIX), UK Riots and all the ongoing discussion of the ''fragile'' global economic recovery!!

Below is a snapshot of todays wildly gyrating markets! For the ''goldbugs'' out there, Gold has been riding high, driven upwards by all the uncertainty & it is overbought in the near term!

The FED has signalled that it wishes to keep rates at record lows well into 2013!----the recovery must be more fragile than they first thought.

Overall, I would refrain from any risk taking at the moment and would look to hedge gold positions. In the medium term, I expect gold to continue to be volatile in a price range of $1550 to $1780(New all time high as of today).

Will come back with some market specific ideas soon.

GOLD : RALLYING IN ALL CURRENCIES

VIX & COMPLACENCY & the UNPREDICTABILITY of MARKETS

Despite all the news on Libya, Japan, the EU Debt crisis and the discussions of raising the US Federal debt ceiling, global stock markets continue to trend upwards.

Are we overdue for a spike in the VIX ?

EVENT RISK FOR MARKETS - CAVEAT EMPTOR

Global equity markets these days seem to be totally unaffected by all the geopolitical turmoil and natural disasters of the last few months.

Once again the ever cautious David Rosenberg chips in with words of wisdom, alerting investors to the many risks that the market is currently ignoring. (Note to readers - David Rosenberg's Newsletter ends its free trial period this month, so this will be the last of his charts on this blog)

GEOPOLITICAL NEWS IMPACTING MARKETS

The last couple of months have really been a roller coaster ride for the world economy.

Whether its the unrest in the Middle East leading to surging Crude Oil prices, or rising food prices or EU Sovereign debt troubles, or the recent Japanese Quake and resulting Tsunamis...... a lot has been going on.
The incredible damage to property and the loss of innocent lives in case of the Japanese quake is really tragic.

There was another important bit of news that went by unnoticed.
"" Wisconsin Gov. Scott Walker on Friday signed into law the controversial bill that eliminates most union rights for public employees""
Wisconsin governor signs anti-union rights bill World DAWN.COM
Wisconsin governor signs into law union curbs Reuters
Clearly the crisis on Main Street is not over yet. As David Rosenberg recently said, the impact of cost cutting and downsizing at the state and local government level will really undermine the '''ongoing consumer recovery'''
So I think that it's time that the guys on Wall Street sit up and take notice.
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The Dow Jones may continue to brush off the impact of rising gasoline & food prices and the discontent on Main Street for now, but the prudent investor must realise that its now too late to join the equity market bandwagon. The risk reward ratio is not in favour of the ''long only'' investor and his margin of safety is far too inadequate at the current time.

IS THE USD OVERSOLD ?

Even as the EURO continues to rally, the USD is breaking down through some critical levels.

While regular readers know my long term view on the USD, let's not forget that the USD appears to be oversold at the moment.

Below is a screenshot of the CNBC website-7th March 2011 - A classic contrarian indicator! As traders get caught up in the surge in Silver prices, everyone is bearish on the USD all of a sudden.

Turmoil in the middle east and North Africa continues to dominate news headlines, easily crowding out news of dissatisfied government workers' unions and the ongoing austerity measures being implemented by state and local governments in the USA.

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Discerning readers will realise that the troubles with Club Med and the 'PIIGS' are far from over.

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Meanwhile the price of Crude Oil continue to trend upwards, and with the US unemployment rate near 10%; this will add further stress to the recovery on main street.

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The stock markets may continue their upward rally for now, but a toxic combination of high unemployment and rising food & energy prices may be just as detrimental to the US Equity market rally as they proved to be for the ''dictators'' of North Africa.

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A sell off in the overbought equity markets could trigger a counter trend rally in the oversold USD.

THE SOFT COMMODITY BOOM CONTINUES

Some call it the Bernanke effect, some blame the BRIC nations, while others blame rising soft commodity prices on the weakening USD.

JIM ROGERS clearly has been spot on as far as the boom in soft commodities goes. Food inflation is making headlines again!

Clearly some of the commodities may be rather overpriced at the moment. Meanwhile speculators and commodity hedge funds continue to build positions in this rather overbought sector. Caveat emptor - Watch this space!

Source : Commodity Prices / Quotes & Commodity Charts - Free - A fantastic site for commodity charts.

SILVER - OFF TO THE RACES !

Silver has been a star performer over the last year.

While prices have corrected slightly from a level of just over $31/oz, the overbought condition in silver means that there could be further downside in the near term if lasts week's weakness in the commodity markets persists.

Below is a chart from some excellent analysis from Adam Hamilton of www.ZealLLC.com

CURRENCY VOLATILITY

Well, after trending downwards for weeks, the USD seems to have stabilized for now, and a counter trend rally in the USD is underway.

Here are some charts that tell the whole story. No one seems to want a strong currency!

• The rally in the EUR, JPY and CHF will hurt exporters in Europe, Japan and Switzerland.

• A weak USD meanwhile, will boost US exports.

• The Chinese have thus far resisted any significant appreciation in the Chinese Yuan.

USD CHF : The CHF broke down below parity in its recent rally vs the USD

USD CAD : It came ever so close to testing parity vs the USD

USD JPY : Despite the efforts of the Bank of Japan to weaken the JPY, the JPY continues its relentless upward march.

EUR USD : A weak EUR helped boost Germany's GDP numbers last quarter. the recent rebound in the EUR will surely make life difficult for the Club Med nations

Conclusion:

The USD appears to be oversold in the near term and a counter trend rally is underway. The market is betting on some mega fire power solution from the US Fed at its meeting in November. If QE2 disappoints and the equity markets sell off, the USD could stage a much stronger rally!

The Equity markets have been getting far too complacent about the weak and worrying news data and unemployment numbers in the US.

Fund flows to emerging markets have boosted stock prices across the board and a correction is well overdue. These markets are ''not decoupled from the actions of the US Fed'' and when the tide starts to turn we can expect large fund outflows to have a drastically negative impact on stock prices in emerging economies

Lastly, the rally in Gold prices also appears ripe for correction and consolidation. Silver prices too, are clearly overstretched in the near term. expect lower prices if the USD stages a comback rally. It's not time to be buying the precious metals sector just yet!

Watch this space!

SHANGHAI COMPOSITE IND. vs. DJIA

The Shanghai Composite is clearly not mirroring the move in the DJIA. Chinese stock markets are testing new lows for the year as concerns of a stumbling recovery in the developed markets continue.

Will we see a revaluation in the Chinese Yuan? Currency markets have been all over the place. The Euro has rebounded of recent panic lows even as sovereign debt troubles in the 'PIIGS' nations remain unresolved.
The USD has given back some of its recent gains, mainly due to an improving risk appetite and the subsequent rebound in global equities.

But as David Rosenberg recently said, are the Chinese Equity markets and the Baltic Dry Index warning investors that we could be in for a difficult second half in FY10?
Perhaps it's now time to be cutting back on risky assets and looking at minimizing portfolio volatility.

MANIC MARKETS - 6 May, 2010 !

Well, here we go again.

I don't know what happened, or why, or who, or whom!!

Let' s wait for more clarifications...

Nice move in Gold...........over $1,200 again!

As I said recently, this is just not the time to be taking on any undue risks.

WELCOME TO 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.

FOMC's wide range forecast!

Obviously, no one at the FOMC is ready to commit on a narrow range as far as economic forecasts go.

As David Rosenberg said in his update this Thanksgiving, FOMC estimates are quite wide. Take a look at his charts on this.

Yes, these are the same guys who in 2008, thought that the sub prime crisis was contained, and that the U.S. economy was in decent enough shape.

And these are the same people who today, are encouraging individuals to spend rather than save, even borrow and spend to save the U.S. economy!

Listen to David Rosenberg - he's one guy who has been consistent in his views all along, and he DOES NOT think that the risk reward ratio for ''risky assets'' favours an investor today!

US UNEMPLOYMENT CONTINUES TO RISE !

The jobless recovery continues.

The Stress tests were way off !! They were nowhere stressful enough; no wonder the banks passed with flying colours. The Market Ticker Blog has more. About Those Stress Tests...

Tim Iacono has more.Jobless rate hits 26-year high at 10.2 percent

Lastly here's yesterday's post from The Automatic Earth Blog.

November 5 2009: Here's how to stop the bleeding

Here's an excerpt

Dylan Ratigan in conversation with William Black:

Ratigan: We have legalized the casino gambling with taxpayer money, literally. It is legal for proprietary trading, which is idle speculation, although perhaps well informed and profitable, with the use of taxpayer insured assets.


Black: We not only legalized it, we backstopped it. If you win, it all goes to you, if you lose, it all goes to the taxpayers, and the American people. That is insane. Everybody knows that’s insane."

Reserve Bank of Australia raises rates again!

Australia's Central Bank repeated its October 2009 comment when it raised rates for a second time by 25 basis points to 3.5%; saying that it is -

"'prudent to lessen gradually the degree of monetary stimulus.'"

Australia Central Bank Raises Rates Again - WSJ.com:

Here's a chart of Interest rates before today's hike:

Let's take another look at the Central Bank's comment:

"'prudent to lessen gradually the degree of monetary stimulus.'"

Are these guys worried about Inflation, Deflation, Stagflation, Asset bubbles or just ADDICTION to monetary stimulus ?

While I do think that rollback of stimulus packages is impossible ( imagine how the stock markets would react!), longer term this free lunch policy is going to cause more imbalances and instability.

Can the Central Banks really start hiking rates aggressively when the 'real economy' is still struggling? - NO

Can rates go up drastically when governments have so much more borrowing to do? -NO

As Marc Faber famously said -its time for Central Bankers to shut the 'Bar' down -its way past last orders anyway!

........only question is........just how are they going to do it??

USD vs the BRAZILIAN REAL (R$)

The Brazilian Real is the currency in Brazil. The Brazilian Real is also known as Reals. The symbol for BRL can be written R$. The Brazilian Real is divided into 100 centavos.

I've been posting quite a bit on currencies recently.
While everyone's been analysing EUR/USD, GBP/USD, USD/CHF etc etc....here's a fresh take on the continuing slide in the USD.

USD/BRL is currently around 1.7550BRL to 1USD. In December 2004, it was well over 2.4O BRL to 1USD.

Being one of the emerging BRIC nations, this 'commodity and natural resources driven economy' has attracted significant fund flows as money moved away from the USD.
A quick glance at the USD/BRL chart below shows that USD has lost over 37% vs the BRL over the past 5 years. It's important to remember that the BRL is a 'commodity currrency', ie. it closely tracks the movement in commodity prices.
(Falling commodity prices are positive for the USD and negative for the BRL)

This explains the collapse of the BRL when commodity prices collapsed in July 2008.


Let me also mention that Brazilian Interest rates are nowhere close to the 'almost zero' interest rates in the US. At their Oct. 21 meeting, the Brazilian Central Bank rate committee members voted to hold the country's Selic base interest rate unchanged at a record low 8.75% annually.

Brazil plans to impose a 2% tax on foreign capital inflows toward equities and fixed-income investments in an effort to slow the ongoing appreciation of the country’s currency.

And while we're at it, let's not forget to compare the performance of the Bovespa ( Brazilian Equity Index: ^BVSP) vs. the DJIA. (the Chart says it all!)














The chart of USD Gold vs BRL Gold is also interesting. Gold has been rallying in all currencies.


So what exactly does this blogger make of all this?

Firstly, I must confess to be no expert on the Brazilian economy or currency.

What I can tell you, is that we are witnessing a gradual empowering of countries in the developing world, primarily the BRIC nations.

These are countries with significantly higher savings rates, hard working populations, cheaper labor rates and significant natural resources in the case of Brazil and Russia.

Brazilian blue chip companies are well known the world over - Vale: the world's largest iron ore miner & the petroleum giant -Petróleo Brasileiro S.A, better known as Petrobras to name two!

As I watch the latest 'Mega' Bond auctions in the USD sail through smoothly for now, I wonder how long it will take for the emerging BRIC nations to gradually stake their claim as dominant and financially strong members of the world economy.

The members of the once dominant G5 : France, Germany, Japan, the United Kingdom, and the United States.

The BRIC nations are : Brazil, Russia, India & China.

It's not going to be smooth sailing all the way through, and the BRIC nations are not insulated or decoupled from the ongoing collapse of consumer consumption and the banking sector pandemonium in the developed world,.................................. but over the long term, I'm betting on the BRIC guys!