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MARKET NOTES: 28TH September, 2011.
MARKET NOTES: 28TH September, 2011.
It is extremely difficult to call markets when they are collapsing since much of the day to day action is driven by technical positions that are randomly liquidated. So one can do little by way of prognosis except to indicate some logical targets that sort of help one judge the intensity of market moves against them. As always the targets are not as important as the market behaviour in these critical areas that helps discern which way the wind is blowing. With that caveat in place, here is my read on the state of some of the markets.
$ Index:
Of all the variables in the market, the $ Index appears to be the most well behaved. It is in a strong intermediate uptrend that started at 73.5 and has a target of 81 set for October or early November. Barring consolidations, the uptrend in the $ Index is all set to continue.
INR moves have basically reflected the recent strength of the $ in the markets. That correlation could see a weakening as Rupee’s own fundamentals assert themselves over the long term. Nevertheless, with the $ Index headed towards 81 mark it is difficult to see the Rupee strengthen against the buck in the near future. A target of 52 remains very much in the realm of possibilities if only because the market’s reaction in that area will be crucial in telling us where the Rupee is headed in the long term. Rupee does look oversold though even as it consolidates above 49 level.
Gold:
Gold appears to be in an intermediate bear market that could last for a couple of years. It appears headed for 1400-1425 area. It is in here that we will really have a clue as to where gold is really headed in this bear phase. No meaningful consolidation appears likely before that area is reached. It is hard to see Gold bullish in the immediate future considering a strengthening $.
Copper:
Copper broke a crucial level at 3.7 that I did not expect it to break. That means one goes back to the drawing boards for a complete overhaul of the picture and a rethink on what the markets is telling one. Having done so, Copper is bearish. Unable to put a target on it but 2.5 will not surprise me. Going purely by the charts and the wrong signals on it, I would suggest there is a lot of substance to Chinese rigging of the Copper market. I won’t be surprised if something nasty turns up. No trading in the metal until the chart becomes clearer.
DOW:
The DOW continues to look pretty bearish. It has twice tested 10,600, a level that has held so far. Further tests of the level should be expected as the impulse wave down from 12,840 unfolds itself. The next major support below 10,600 lies in the 9780 area. It is a level that could be tested as we go along. The breakdown in Copper charts suggests that we are in for far deeper corrections than envisaged before.
Shanghai Composite:
SC Index appears to be headed for a retest of 2330 level sometime mid-November or before. The really crucial area spans 2280 to 2330. Upon this area providing a solid bounce to the Chinese markets, one could begin to hope for better things to come. Of all the world markets, China appears to be one that might bottom out earliest & most convincingly. That is all the more reason to watch this index for clues in the 2280-2330 area. A failure to hold this area will mean a retest of 1680 a level last tested in the crash of 2008. What that means for the rest of the world is hard to imagine!
Sensex:
It is tempting to say that the Sensex is tamely proceeding to the expected target level of 15,000 to 15,500 that one had expected. The Copper breakdown is warning that nasty surprises may be in store albeit for a very short period of time. The 15,500 area is crucial and has been tested twice so far holding up well. In terms of time we have the whole of October and a part of November before world markets tell us where they are headed. So the level will almost certainly be tested again. Upon a failure of 15,000, the level of 13,500 looms. However, not all stocks bottom at the same time nor can all be bought at the lowest price. These are not markets to sell in but selectively buy for the long-term portfolio.
NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions
Is India ungovernable?
India is seething with frenetic activity in its small towns and countryside. Noisy traffic, chaotic roads, shops spilling out onto pavements, uncollected garbage that mysteriously clears itself, illegally tapped overhead power lines, all add to the visible chaos that greets an onlooker. Then there are the intense crowds, a vast sea of mostly young faces, racing hither and thither but going nowhere. Most are busy but have no jobs. It is a bit like the Brownian movement of pollen grains on the surface of water under a microscope. You see intense, ceaseless, energetic, swiftly darting particles in all directions. But collectively they are stationary, even placid, going nowhere. There is energy but randomness and lack of direction makes it useless. Vibrant, talented, resourceful as individuals, collectively we are a flaccid, indifferent, confused and incoherent society. It is not the lack of organisation that is a constraint. We are simply not coherent enough to generate a common set of objectives, agree on the resources required and find the will to execute the plan necessary to achieve those objectives. The matrix that integrates people with the resources available to create value above and beyond the capacity of an individual is somehow missing. It is as if you had 200 of the best musicians on hand but each had his or her own self-generated music sheet to play from. Playing together they produce a shrill cacophony instead of orchestral music. The collective is worth a lot less than the assembled individuals. What is missing?
We are a diverse nation, with many languages, many cultures and religions, old traditions and differing value systems. Our diversity adds another layer of complexity over and above that inherent in a developing, modernising society. To fashion a shared value system and culture that is conducive to purposeful collaboration between individuals and different segments of society is therefore a central imperative for us. Even as we have changed the development paradigm for ourselves over the last 20 years, the new model has neither been reflected in popular culture and the education system, nor does it inform our sense of values. Old socialistic shibboleths continue to be peddled in movies, school texts and the popular idiom, so much so that even routine conversation in terms of a market-based paradigm with other people becomes impossible. The mai-baap sarkar (mama-papa state) narrative still dominates all discourse with little attention paid to personal initiative and responsibility. Furthermore, the models that make collaboration between individuals as the central creators of value in a civilised society characterised by trust and fair trade are completely absent. Take the need for public transport or school buses in small towns. Municipal bus services in small towns, locally managed by the citizens themselves, would be the most economically efficient way of providing transport to citizens. No such services exist. Instead, expensive personal transport supplemented by private auto-rickshaws dominates universally. The reasons for this anomaly are many. Regardless, we have to overcome obstacles and create such services before we doom ourselves by wasteful pollution. Creating the ‘felt need’ among people themselves for such rational collective solutions to collective problems is what we are missing in our discourse. How can we embed enablers such as the one above in our discourse?
A society gives itself coherence through a shared set of values that are deeply embedded in religion, culture, and tradition on the one hand and the education system on the other. The Anglo-Saxon system of values that dominates the US was largely a product of the Protestant work ethic. To note this is not to espouse that system but to highlight how deeply these models need to be embedded before they are able to cut through the clutter of individual perceptions and idiosyncrasies making fair collaboration among people possible and productive. Where are our equivalent models embedded? The awful truth is that they do not exist, and where they do, say in the education system, they are largely informed by the Nehruvian vision of a state built economy where the omniscient sarkar (government) volunteers to provide everything from the cradle to the grave. If that sounds outlandish ask any young 20-something of his or her dream. It will invariably be to find a job, get married, buy a house, educate kids, and retire. Note carefully the emphasis on finding a job. It is always one job, a career, a cradle to the grave. Needless to say, in a modern economy that is largely fictional. If our expectations and perceptions are so distanced from reality, how can we expect people to arrive at a consensus that is a prerequisite for purposeful collaboration? No wonder most of our new ideas and innovations are stillborn, dead on arrival because the enabling matrix of paradigms to see and find value in them simply does not exist. An innovator among us dies selling just his initial concept to infertile and out of sync minds. That is our biggest weakness today — our inability to sell valid ideas whose utility is as clear as daylight but one that requires collaboration among people working as a team. The cost to society of an incoherent discourse out of sync with reality in incalculable.
We do not have the luxury of rewriting our religious texts. Nevertheless, we should research them for parables that can teach us the value of collaboration in a meaningful way. The most practical way to embed such knowledge is in the school texts. The state did this to propagate its preferred paradigms under Nehru and Indira Gandhi. Those texts need revision. Meaningful reforms will come a lot easier if the state takes care to educate its citizens properly.
None of the above is a substitute for visionary leadership and orchestration by a committed set of politicians. The lead for this must come from the top. The myth of a mai-baap sarkar equipped with an unlimited treasury that collects revenue out of thin air must be completely dispelled. The equation between taxes and social spending to eliminate poverty should be made explicit. Likewise, empty shibboleths like the ‘common man’ should be replaced by more meaningful terms like ‘taxpayers’ and ‘consumers’ that make fudging of concepts less likely. ‘Small’ is another carryover from the socialistic era that was used to perpetuate a license-permit-Raj and large scale tax evasion. Such examples can be multiplied.
As we grow in numbers, and management of society becomes increasingly complex, we will hit multiple constraints of the sort obvious in infrastructure today. Such problems cannot be solved without a certain degree of society-wide coherence brought about by a sense of shared values, common concepts, and known working models. If we do not embed these in our education system and teach people to use them intelligently, we will be forced to look at Chinese coercive models sooner or later through sheer tyranny of increasing numbers and escalating constraints. We must therefore wake up to imminent dangers now. Politicians too must be compelled to shed their model of a mai-baap sarkar with them as dispensers of state largesse. They must adopt a more rational model as leaders of people engaged in building the hard and soft infrastructure that enables individuals to live to their full potential.
The writer is a trader. She can be reached at sonali.ranade@hotmail.com
Why is Pakistan pushing US so hard in Afghanistan at this point?
Consider.
What are the possible outcomes AFTER 2014 in Afghanistan assuming Obama is re-elected?
- A complete US withdrawal from Afghanistan with an outright takeover of most areas of Afghanistan by the Taliban.
- US cedes most of Southern Afghanistan to direct Taliban control while NA retains areas to the North with a power sharing at the federal level in Kabul. Under this outcome, US retain a base in Afghanistan along with a few thousand Special Forces to guarantee good behaviour and also pay for the upkeep of the Afghan Army at the federal level.
- The present stalemate continues.
Clearly, outcome [1] above is what Pakistan would prefer while something close to [2] is the preferred outcome of the US. Outcome [3] has already proved untenable and unacceptable to both the US and Pakistan. One might rule out complete independence to Afghanistan from consideration. One can bring other players like Iran, Russia, China and India into the analysis but that will be clearly AFTER [1] looks all but certain. So it can be ignored now for our limited purpose. Our question is merely confined to why is Pakistan pushing the US so aggressively and early in the game considering this is just 2012 and real US drawdown begins 2014.
Consider outcome [2] in some detail for its implications for Pakistan’s control of Afghanistan, not just its stated desire to see Phaktuns gain a share in power and check Indian influence in Kabul.
Outcome [2], if it results in stability in Afghanistan, will set off an inexorable process whereby the following things can happen:
- A need for money to pay for army and Govt expenses means the Federal Govt will always be beholden to the US putting the latter in the driver’s seat with minimum outlay of troops and treasure. The US can use a small force along with air power to deny sanctuaries in Afghanistan to any rebel Taliban or forces hostile to them. Meanwhile they can continue to build the Afghan army.
- Afghanistan has been fighting for well nigh 40 years. As these cycles go, the civilian population, weary of fighting, will begin to punish rebels by passing on intel on rebels to Govt forces, a phenomenon that sounds the death knell of an insurgency.
- Over a period of time Pashtuns, north and south of the Durand line, will begin to think of a homeland, something that can unravel Pakistan’s own territorial integrity.
- This set-up leaves Pakistan with highly armed militias on its own soil with no prospect for their rehabilitation. One way or the other, these people will fight for their own survival – either in Afghanistan or in Pakistan.
Outcome [2] is something that Pakistan really dreads and will seek to avoid at all costs if it can. For outcome [2] means that all of the investments that Pakistan has made in terror assets so far, at great cost at home in blood and treasure, come to a naught. Furthermore, it leaves Pakistan with an intractable Pasthun problem of its own on its own soil. Lastly, a combination of its own Jihadis and rebel Pashtuns will seek power in Islamabad rather than Kabul, a prospect nobody can relish, not even the US itself.
So it is safe to say that while Pakistan will word its demand as one seeking participation in the peace process, the real reason is to pre-empt outcome [2] or anything close to it. That unfortunately can be accomplished only by a complete bug out of the US from Afghanistan.
Pakistan calculates that US will to fight with elections looming large is at its lowest over the next election cycle. A determined intensification of the insurgency in Kabul and areas north to it can push the US into believing that outcome [2] is infeasible or too expensive to try for. The hope is that the US will conclude a complete bug out, albeit with a face-saver, is the solution which Pakistan can provide. There is no downside to this strategy to Pakistan at this point in time. Aid has been suspended anyway. US dependence on Pakistan for logistics ensures no harsh punitive measures can be taken by the US. And the need for face saver, in case of outcome [1] being acceptable to the US, ensures the latter will never sanction Pakistan till it is all over.
So Pakistan’s intensification of insurgency in Afghanistan can be expected to continue until US figures out a way to make the cost of doing so prohibitive. The US has limited options until it is able to reduce its logistical dependence on Pakistan by drawing down troops and building up supplies.
NB: I am no student of strategy. I read stuff on International Politics only to the extent of being aware of what shapes markets. So this is merely a lay person’s reading without any pretense at anything beyond that.
Narendra Modi: Is he the leader for these times?
Narendra Modi’s attempt to transition from Gujarat to the national level has the potential to polarise, and perhaps fracture, the Indian political consensus as none other before him in India’s nascent democracy. Modi’s aspiration to the highest executive office is entirely legitimate and backed by a credible record of managing the economy of Gujarat. He has proved to be an able administrator though he remains untested as a reformer. Gujarat was one of the top performing states economically much before Narendra Modi arrived on the scene. Nevertheless in a country mired in maladministration and corruption, his record as an administrator with a relatively unblemished slate on corruption stands out. India remains a highly diverse polity that rarely votes on a single issue through the length and breadth of its continental size. Can the highly polarising personality of Modi transcend the local nature of Indian politics and emerge as a leader who can unite us around a set of issues like economic reforms that need urgent attention? Modi’s rise from Ahmedabad to Delhi must be judged in the context of India’s need of the hour. Is Modi the man for these times?
Modi is often conflated with the issue of secularism because of his acts of omission and commission as the chief minister in Gujarat during the 2002 riots that killed thousands, most of whom were Muslims. The riots were seen as retaliation by the majority community for killing of RSS karsevaks (volunteers) in a train at Godhra. The riots happened on Modi’s watch. Modi’s fulminations against Muslims in particular are a matter of public record. To date Modi has said or done little to make amends for his failure to prevent the riots, which lasted over a week. For somebody who claims to be an able administrator, that omission is ominous. The presumption is that Modi cannot apologise for the riots for fear of alienating his political base of obscurantists. Modi’s subsequent actions in destruction of records pertaining to the riots and persecution of dissenting officers raise deep issues of integrity in his administration. Despite Gujarat and other communal riots that have flared up from time to time, against Muslims and other communities, India’s commitment to build a secular polity that derives legitimacy from a written constitution as opposed to divinity remains firm and resolute. Modi’s accession to Delhi will not reverse India’s commitment to secular ideals. But his accession has the potential to mire India in a sterile debate over secularism when the need of the hour is economic reforms that can end the sort of cronyism that Congress politicians have unleashed in their years in office for self-aggrandisement. If it does so, India could lose another decade in futile bickering.
For some sections of the Indian polity, particularly the right wing, Modi’s rise represents a certain impatience with the slow and dilatory processes for evolving a consensus. Far better to cut through the clutter through a leader who has clarity of thought and the ability to implement his ideas. That this desire represents a throwback to the implied wish for a benevolent dictator worries them not. India’s own experience with the emergency imposed by Indira Gandhi in the 70s should serve to remind them of the danger this represents. Family planning as a way to limit population growth was, and is, an excellent idea worth pursuing with all the resources at our command. But the coercive tactics that the goons of Sanjay Gandhi used to implement the ideal invited a backlash that makes it a dirty word even after 40 years. Shortcuts to an ideal, howsoever cherished and legitimate it may be, are not always the quickest way of getting there. Consensus must precede reform in a diverse polity if it is not to be fractured. The same holds true for economic reforms. Most of the reforms that have been implemented to date have been by stealth or justified by an overriding necessity. The problem is not so much convincing the powers that be that reforms are necessary. The problem is that politicians across the board are more eager to sell themselves as benevolent purveyors of a limitless largesse awaiting distribution that is unfairly denied to them by rival corrupt politicians. Indian politicians must transition from the role of dispensers of ‘free’ goodies to sellers of reforms that emphasise hard work, merit and fair returns to all those involved in productive processes. Can Modi accomplish that onerous but important job? Can he tap into the aspirations of the young for a decent job and show them the way through education and not entitlements? The true test of a leader for our times will lie in his or her ability to sell a vision for our future that addresses the aspirations of the 18-30 age group of our voters. Much as the Congress would like otherwise, Rahul Gandhi has simply failed to show that aptitude. Can Modi fill the gap that our other geriatric leaders simply cannot grasp?
The wasted years and opportunities of the UPA2 arid years make it imperative that the next elections are about India’s future and not its past. Anna Hazare’s rise as a mass leader outside our normal political system is a grim reminder to politicians that their grimy politics of asset gathering while in office has outlived its utility. If that entails urgent electoral reforms, then those must be put in place before the 2014 elections. The system must change and adapt before it irretrievably breaks down. Electoral reforms brook no delay. Likewise, Modi’s appeal, despite the questions surrounding his role in the 2002 riots, centre on his role as an effective administrator in post-riots Gujarat. Both Anna and Modi personify a breakdown of normal pork and identity-based politics in the Congress mould as practiced by almost every political party. They are a challenge to the existing system but also an opportunity for change. What will be important going forward is not so much what Modi does to pursue his legitimate claim to the highest office but what the system does to meet his challenge.
It would be a pity if Modi’s challenge degenerates into a debate over secularism harking back to the past. Modi himself can do a lot to prevent that from happening by making suitable amends for his role in the riots and reaffirming his faith in the basic configuration of our polity. Modi perhaps is the only person who can draw a line under 2002 in time for the 2014 elections. The courts cannot. Any attempt to ‘manufacture’ a political acquittal by distorting the Supreme Court’s legal verdict can only boomerang and mire the debate in sterile polemics about secularism and the like. In any democracy, the rule of law must precede democracy itself for democracy cannot survive without the rule of law. The argument that Modi’s acts of omission and commission have been washed away by the electoral verdicts since 2002 should not hold. That they are peddled around seriously is a reflection of our immaturity as a democracy. Absent a court verdict it is for Modi himself to make amends. It is time to move on and Modi can help move the debate to one about our future rather than the past. Will Modi rise to the occasion? That is something Modi alone can answer and answer right he must.
Market Notes: 15th September, 2011.
Dollar Index:
The US dollar is showing signs of consolidation above the top of the previous trading range of 72.8 to 76.5 trading range. A failure to penetrate 76 over the next week or two will confirm a move to a new trading range between the low of 76.5 and a high of 81.5. There is a fair probability that the US $ has turned bullish in the medium term and could test further higher levels before a meaningful correction. Upon a failure to penetrate the floor of 76, Dollar bears still trapped will have to cut their shorts leading to a further flare up in buck. In any case it is not the time to be short Dollars in the market.
Frankly surprised by the size of the move in the INR against the US $. There was nothing in the fundamentals that warranted a move in the INR from R 44 to 48 in such a short span of time unless there are too many shorts caught on the wrong side of the trade which is very likely. Sentiment reading show people are still bearish on the $ in the medium term, an outlook not warranted by the moves in the $ Index that we saw above. As the $ Index consolidates above 76, INR should also consolidate above 47 before moving to test the top of the current trading range between 47 and 49. It appears highly unlikely that we will see a move below 47 on the INR anytime soon. Shorts should cover if trapped.
BSE SENSEX:
The Sensex turned as anticipated before the overhead resistance of 17,500 confirming that it remains in a medium term downturn with a target around 15,500. A further gap in the chart above 16,700 adds to the shorter overhead indicating trapped bulls. With the markets firmly in the hands of bears, the charts show no immediate upturn worth noting. Being at the tail end of a medium term correction, savvy investors will be covering shorts and/or going long in their favored scrips. No change in the prognosis for the Indian equity markets.
NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions.
Wikileaks: Can we handle the truth?
Do we all live in the same world? As WikiLeaks brought the latest treasure trove of un-redacted diplomatic cables into the public domain, one could not help but wonder if the reality created for us, and the reality ‘they’ see, are situated in the same universe. The gulf between the myths that popular media peddles and the reality that the faceless bureaucracy of the US sought to uncover for their own diplomats provided a crack in the facade through which one could peer at the process by which reality is produced for us. It offered a fleeting opportunity to experience the blinkers we wear unawares that filter out what we are not supposed to see. It was not that the emperor had no clothes; that was something we had suspected all along. But the fact that those reporting to us were more a part of the filters than the eyes and ears we thought we had, produced a sense of betrayal and despair that was hard to ignore. It is one thing to have a point of view. It is quite a different thing to consistently project a point of view. The popular media came across as a mere extension of the apparatus that produces the matrix that runs our lives. It was a very bleak and lonely moment when one more prop that holds one’s world together just dropped away.
Myth making has a long history and tradition. The pharaohs had snake charmers and magicians in their courts to awe the hoi polloi with their supernatural powers. The purpose of the trickery was not so much to demonstrate power. Its real utility lay in subliminally persuading the audience that they were incapable of exercising such power, being inherently inferior to their masters. Time and education have diminished the old myths. But myth makers responded with ever more subtle and elaborate schema. If leaders need to be trained to lead, followers need even more, not less, training to be followers. Servility does not come easy. Religion, culture, tradition, education, all have been pressed into service to create docile subjects.
Democracy had apparently broken this spell over us by inventing a dedicated pair of eyes and ears independent of the powers that be to report on reality to us. WikiLeaks showed our media had switched sides. It did not report reality but something else. It was not the missing clinical objectivity. It was its meek acceptance that it had a role to play in sustaining the system, of being a responsible player in the scheme of things. Responsible to whom? And hey, what happened to my eyes and ears?
Unedited, unprocessed, raw truth was something unsuitable for our palates. It had to be processed by a journalistic sensitivity, made coherent and comprehensible by a higher intelligence, and balanced by a superior judgement before it could be served to us mortals. Perhaps that is so. From whence did this obligation to sustain the system spring from? Who mandated it? Just think about it for a minute. Here is the civil service of a country, creating a huge bureaucratic apparatus, to process published information at an enormous expense in order to make sense of it. That shows the amount of noise that is present in the media’s output. But that is not all. It then goes out to principal actors, systematically pumps them for their views, crosschecks and cross-references the information to piece together something it can finally use. The product it ends up with is not only closer to the truth but is vastly different from that purveyed by the media that was supposed to have the truth in the first place. It takes more effort to deconstruct the story put out by the media to arrive at the truth than it takes to simply report the truth. And we are being ‘served’ by the media? The media was not pointing us at the truth; it was pointing us away from the truth. Mind, the WikiLeaks cables are diplomatic cables dealing with issues in the public domain. The WikiLeaks trove contains nothing pertaining to intelligence-related material, which is another world altogether.
One is not questioning the need for executive privilege here. Nor the fact that diplomacy may often need to be conducted in privacy, even secrecy, as options likely to inflame passions are examined, discussed and discarded. Indeed, just as individuals need some privacy, governments too need privacy for the actors therein to be able to freely and frankly consult, brainstorm, collaborate and report things among themselves. Rather one is focusing on the end result of the media’s exertions and those produced by the US state bureaucracy for their own use. Why are the two so different? Why is the US civil service’s product more credible? Why did our media filter out what we obviously wish to know and pay for knowing it? It is hard to believe that stuff filtered out was just journalistic discretion professionally employed. If so, the problem goes even deeper.
It is easy to dismiss the wide gulf between reality and media projection as something occasioned by technology that disrupted the media business model. Or that it has been brought on by increasing corporate ownership and excessive concentration. To blame it on general malfeasance that plagues our times is even more meaningless. The dichotomy between the media’s role as a pillar of democracy and its role as our eyes and ears was a small crack that has induced further and deeper fractures as the media now serves multiple masters. It is at once beholden to the presiding powers that seek to shape our discourse, to its shareholders for profits, to its advertisers who often dictate policy, and a variety of other interest groups not all of whom are visible. We as readers and viewers figure as just one element in the matrix that defines the media and the role it plays in our lives. One thing should be clear. We as citizens no longer own its primary responsibility as we were taught to expect. Things have changed.
The need for somebody to collect, collate, even analyse and offer opinion on events, people and ideas around us will not go away. Indeed as change accelerates, and complexity multiplies, education becomes a continuous process through one’s life. Journalists as an intermediary in the process of knowledge dissemination will endure. Perhaps journalists may have to transition from being jacks-of-all-trades to masters of a few specialised ones. Information of the sort put out by WikiLeaks is simply too cluttered and voluminous to be of any use in everyday life. But to survive the credibility gap revealed by WikiLeaks is another story altogether. Are blogs produced by individuals and paid for through individual subscriptions part of the answer? That would blend a common platform provided by a media house together with the individual credibility and track record of a journalist as a person. Whatever the answer, trust must return to the relationship between a journalist and her readers. Without trust, the script running the matrix will simply invite rebellion and then chaos.
Market Notes: 11th September, 2011. Are the PIGS out of the sty?
Dollar Index:
In the current up move that began on 4th May, 2011, the $Index has traversed in a range marked by a low of 73.20 and a high of 76.56 on a closing basis. On 9th September, 2011, the $Index zoomed passed this well defined trading range to close at 77.30. With that breakout to the top the $ has dispelled any doubts that it is seeking a lower low in the medium term confirming my prognosis that the $ had very little downside from the current levels. Ideally one would like the $ to come back to test the level of 76.4 to confirm the bottom of the new higher trading range before rallying further. The new trading range could settle between 76 and 81. Confirmation of the new trading range should come over the next week or two.
French CAC:
The French equity index has been in a long term bear market since 5th September, 2000. The high scored then was 6960. No, the CAC did not make a new high in 2007 with the rest of the world, peaking out at 6160 in June of that year, well below the previous peak of 6960. CAC certainly can’t be accused of misleading about the deteriorating fundamentals of the French economy. It nevertheless fell sharply along with the world markets in 2008 traversing a range from 6160 to a low of 2500, which incidentally was the previous trading range top prior to 1994 and continues to be a multi-year bottom since then. In keeping with its long term bearish trend, the CAC’s rally from the low of March, 2009 has been muted compared to its peers in the OECD peaking out at 4100, some 50% short of its previous top. The Index is currently headed to test the bottom of the range at 2500 that could come in May of next year. Is CAC a good indicator of the long-term underlying problems in the France? Perhaps a look at the DAX provides some clues. Bulls in France are an endangered species even if the downside is limited to 2500 or thereabouts.
German DAX:
The DAX is something of a half way house between the DOW and the CAC, being much stronger than the CAC in performance but not quite in the DOW league. Intuitively that makes sense in terms of the inherent export strength of the Germany economy. To keep the analysis consistent with that of CAC in terms of time frame and wave counts, DAX begins its tryst with the bear in March of 2000 from a top of 8100. Note DOW too peaked around that time before crashing from the excesses of the tech bubble but made a higher high in 2007. DAX crashed to low of 2260 in March, 2003 testing the top of its previous trading range prior to 1994 and then rallied along with world markets to high of 8100 December 2007 but failing to make a new high. DAX’s rally from March 2009 has mirrored that of the DOW in time and strength being significantly better than that of the CAC. Peaking still to a lower high of 7600, the DAX too confirmed its long term bear market. Having broken through the support at 5500, the DAX now faces a lower target in the region of 4200 to be reached sometime March, 2012. Again, the DAX is significantly weaker than the DOW though in far better shape than the other engine of the EU, viz., CAC. Let us look at one of the PIGS to nail down this analysis.
Madrid General:
Madrid began its last bull run in tandem with the World markets in December 1992 going on to make a peak of 1740 in December 2007. Since then it has been in a free fall but pretty orderly in terms of pattern. Its current support lies at 800. Paradoxically the Spanish market has bottomed out at the current level of 800 both in terms of level and time. Expect to see a respectable rally from these levels. Have the PIGS bottomed out and only the stronger members are left holding the unpaid bills? [Not going to into the Spanish wave count in detail. But pretty sure we have already seen a near term bottom.] Let us take look at the worst pig of them all – Greece.
Greece General:
The Greeks started their rally from a level of 550 in November 1992 along with the rest of Europe and peaked out at 6500 September, 1999. The numbers give you vertigo! It has been a nightmare since and in fact it would hazardous to speak of any wave counts here given the rather bizarre behavior of the Greeks. Nevertheless, it is safe to assume that a secular bear market commenced at 6500 in 1999. If so, we are in Wave III of that bear market with a downside target of 800. Irony we are almost there and it would be surprising if that support were to yield because it is for all practical purposes the beginning of the last bull market at 650 in November 1992. The Greeks are already scrapping the bottom of the barrel give or take 100 points. That sort of ties in with the Spanish market as well.
The PIGS are done with pulling the market down by themselves. What remains unresolved is the burden sharing of their revival by the stronger members of the EU who have further room to fall as they reckon with the actual bills. Overall, you should be looking to cover shorts rather than selling in each of these markets. Don’t bet on an immediate rally though other than the usual corrective bear rallies till the end of the year.
NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions.
Market Notes: 7th September, 2011
Dollar Index: The Dollar Index has moved in an orderly fashion despite the tumultuous news flow that had markets in turmoil. That in itself is remarkable. Starting at 2nd May, 2011, the $ Index commenced an impulse wave up and is currently traversing the first half of Wave III. The $ made a fairly large move up on 6th September and the first major overhead resistance lies at 76.75. A break atop 78 will confirm the medium term prognosis of test of 81.5 sometime before the end of this year. Despite all the bearish news on the $, the charts don’t show up any $ weakness apart from a need to consolidate yesterday’s large move up. $ Strength near-term is negatively correlated with US equity markets. But we will have more on that correlation later.
Gold spot: Gold did some expected things yesterday that are worth noting. Firstly, the closing high in spot gold markets was $1897.1 achieved on 22nd August this year. Gold has dropped sharply from that level to 1750.55 in two trading sessions before coming up again to test the previous top of 1897.1 yesterday. Gold opened higher on 6th at 1902.59, higher than the closing high of the previous session, went on to make a high of 1920.3 before dropping to a close of 1872.9, below the previous close. That makes for a key reversal in price action worth noting. The failed test of the previous top marks a potential double top in gold at 1900 level. The next few days’ market action in gold will be critical. Unless the market takes gold well atop 1902.59 on good volume, the gold rally ends with the double top at 1900 in the medium term.
Sensex: After making a low of 15,765 on 26th August the Sensex has rallied to a high of 16,989 on 2nd September. An early sign that the markets have completed their correction would be a rally above 17,500. Considering that we are the tail end of a correction markets can be expected to be choppy as different groups of stocks bottom out at different times during this period. Prognosis remains the same. Pick your preferred blue chips on dips when the news is all doom and gloom between now and mid-October. It is accumulation time for blue chips.
NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions.
Reversing India’s falling growth rate
Where do business profits come from?
It is remarkable that in an age dominated by Capitalism, capitalistic theories of economics have so little to say about the very force that motivates all entrepreneurial activity – the quest for profits! Micro-economic theory briefly ventures into the field. But what is true for an individual firm is not necessarily true for the economy at the macro level. What then drives aggregate business profits in an economy? To the extent investment is predicated on expectations of future profits, and investments determine growth in GDP of developing economies like India, you would think this question would be at the heart of policy formulation. The sad fact is such considerations don’t figure in policy making because mainstream economics lacks a theory of profits! Worse, and with no apologies to Ayn Rand fans, to understand where profits come from one has to turn to Karl Marx, and a later day Marxist from Poland, Michal Kalecki, for a workable theory of profits.
Marx’s insight into the source of profits comes from his studies of money. Simply put Marx said an entrepreneur invests M amount of money to buy a commodity which he then attempts to sell at a higher price M’, the difference between the two being profit. But he lost his way in metaphysical questions surrounding value and ended up ascribing all value as being created by labour which the entrepreneur “unfairly” captured. Michal Kalecki started with Marx’s original insight and ended up holding that business profits are nothing but the original money spent by the entrepreneur returned to him if he is clever enough to capture it. One can summarize his theory in two statements: Firstly, workers as consumers spend what they get. Secondly entrepreneurs get as profits what they spend. The model is explained well in the references below. For our purposes the model may be stated as:
Pn = I + [G-T] + NX + Cp – Sw
where Pn is the gross profit of all businesses after tax, I is the investment made by all firms in the economy, [G-T] is the Government deficit representing the difference between Government spending and tax receipts, Nx is net exports, Cp is consumption by entrepreneurs themselves [think capital flight] and Sw is the aggregate saving of all workers in the economy. What we are basically saying is aggregate profits earned by firms in any economy are the sum of investments made by them plus net contribution to the pool of profits by Government, earnings from exports less what is put away for a rainy day by workers who refuse to spend all they earn. Cp is usually very small at the macro level unless you think of capital flight from an economy.
Now we have basically turned economic theory on its head. Yet ask any entrepreneur and he will vouch for the truth of the above equation. Why do neoclassical economic theorists gloss over the central role of business profits in macro-economic theory? That is well beyond the scope of this article here but I refer you to the blog below. Briefly, if you take business profits into account then the so-called stability of the economy as whole falls apart. So for the moment we will simply use the above Kalecki equation to look at what might be done in order to arrest and reverse the falling growth rate in the Indian economy.
Let us begin by noting what is not in the equation. That by itself is remarkable. Inflation doesn’t figure here, neither do interest rates. What matters first and foremost is investment by businesses themselves. When investment falls, business profits fall, and when expectations of business profit fall, investment falls even more, setting up a vicious downward spiral. Note the direction of causation. Profits are caused by investment. It is simply what businesses spend that is returned to them. Second, budget deficits are good for profits. Any entrepreneur worth his salt will tell you that. He doesn’t mind inflation either as long as it doesn’t destruct demand. Interest rates are irrelevant from a macro perspective as long as aggregate demand holds up. It is the absolute value of money added to the profit pool that matters for business profits.
Net exports add to the profit pool because the workers and investment used to create the export goods are in the local economy while the money that pays for them comes from abroad. Exports earnings contribute to the profit pool. Conversely imports take away from the profit pool because the money to pay for goods and services takes away from the local spending. So if an economy is running a current account deficit, like ours is, the deficit takes away from the profit pool and must be compensated for by a matching Government deficit or the economy would spin into a deflationary spiral.
Lastly consider the matter of workers’ savings. To the extent they save, the total pool of profits available to firms diminishes. Now you know why firms don’t want you to save and bankers actually drive you into debt. Savings a just bad news and if workers save the Government must offset the savings by spending if firms are to recover their investments. If workers save, and Government doesn’t offset that by spending itself, you risk the dreaded deflationary spiral of death.
Seen in light of the Kalecki equation, why has the Indian growth rate dropped to 7% from 9% earlier? Among the many factors that one can think of 3 that stand out for policy action.
Firstly, expectations of profits have fallen because of worldwide deflation reducing investment. Government needs to step in boldly by reversing those expectations by stepping up its own investment in infrastructure. The deficit it creates is good for business profits and catalyzing more investment by private firms. Corruption, bottle necks in land acquisition, red tape etc are often cited as contributing to the slow down. That wasn’t true of China and isn’t true of India. What matters is Government willingness to invest in infrastructure by itself or catalyzing such investment through State owned institutions as in China. Firms will look at the size of profit pool available: either made available by Government or by the investments made by fellow firms. That is a searing insight provided by the Kalecki model.
Secondly, India’s savings habbits are dangerously deflationary, especially the recent upsurge in savings through investment in gold. Gold imports take away from the profit pool through imports. It is a double whammy. Not only must Government offset these savings by a matching deficit but also the asset created contributes nothing to local spending since gold is imported. Government would do well to tax gold and offer matching tax concessions on housing to promote domestic growth as housing is an attractive hedge against inflation, is not imported and contributes to local spending compared to imported gold. Savings by investment in housing add to the profit pool since to firms that saving is also spending. That policy reform brookes no delay.
Lastly, our slow down has been caused by growth hitting supply side capacity constraints caused by paucity of Government investment in areas of infrastructure that it insists on controlling. It isn’t lack of demand: latent or otherwise. Our inflation level reflects the friction of capacity constraints in agriculture and infrastructure that need supply side policy changes rather than tighter money and higher interest rates. Government must address the root cause of inflation which is underinvestment in agriculture and infrastructure.
Philip Pilkington: Profits in a Capitalist Economy – Where Do They Come From, Where Do They Go?
Market Notes 31st Aug., 2011
Nikkei started its run to the bottom in December 1989 from a high of 38,882. It made its first low of 14,300 in June, 1995 after a full five part impulse wave down. This low failed to pierce an earlier low at more or less the same level in 1992 after which, the Nikkei tried to rally meeting with a resistance at 23,000 which it has never pierced since. Wave III of the down move on the Nikkei starting June, 1996 made a lower low at 7,500 in May 2003 before rallying to lower high of 17,300 in April, 2006. Wave V, the last of the impulse waves down, commenced in Mid February, 2007 from a level of 18,200 and continues. Wave 3 of the last wave down, made a new low of 6940 in October 2008 which has been tested 2 times since in wave 5 of Wave V and in those tests Nikkei held well above 6940. The last major low, in the 9,500 area was in March this year which is currently being retested.
Taking into account the wave count over the last 24 years of correction, the probability of the 9,500 area being breached is pretty low. While Nikkei hasn’t made new highs as the world markets peaked in 2008, its ebb and flow has been fairly well correlated to that of the rest of the world markets. Nikkei is one major index that gives signals a bottom formation in equity markets may not be too far off. On the Nikkei itself, some sort of a confirmation of this should be in evidence by end of September this year.
Dollar Index:
The Dollar Index slide was examined in notes of 8/17 here https://sonaliranade.wordpress.com/2011/08/18/market-notes-8172011/ . The index is currently testing the last low 72.85 made in April this year. Nothing in the market action, including the near certainty of QE3, has induced the $ to make a lower low against its trading partners so far. A breach looks unlikely and the prognosis in the medium term of 6 months to a year remains the same. Note, this upward bias in the $ is against its trading partners. It doesn’t mean the $, together with the currencies of its trading partners, will not depreciate against gold or a clutch of other physical commodities. Dollar debasement can well continue even as the currency trends upwards against its trading partners.
Copper:
HG Copper is interestingly poised in the 4.23 area, having rallied as expected. This area on the long term chart is the “break out” level beyond which much higher highs for the metal are possible. Despite a margin squeeze on bulls by the Chinese Govt., the metal has held firm. A break out in the near term is unlikely. That typically takes to 3 or 4 attempts. But the metal shows little indication of the weakness that one would expect in the prevailing doom and gloom evident in equity markets.
Corn:
CBT Corn has been in a major bull market from November, 2005 starting from a level of 188 [5000 Bushels contract.] It is currently testing its all time high area of 760 and is well positioned for a break out. Chinese appetite for corn to feed pigs is relentless. That the price has held high despite a weakness in crude prices points to tightness in the underlying physical market. On a break out, corn prices can go anywhere on the charts. Again, that is not likely to happen at the next attempt to take out the previous top. A breakout could take time but the trend remains bullish.
S&P 500:
The 1150 area on the S&P 500 represents the mid-way point between the low and high on the index for the last 20 years of the last bull markets. Interesting then, that the Index is moving back and forth around this level indicating the bulls and bears are evenly matched at the mid-point. By my reckoning, S&P500 is in the middle of its Wave 3 down that started in April, and is likely to come back to retest the recent low 1100 at least a couple of times between now and March 2012. The bear rallies from 1100 could be sharp. But the main trend on the index continues to be bearish.
Shanghai Composite:
The prognosis on the Shanghai Composite remains the same. It is in a down trend that appears destined to retest the recent lows around 2300-2350 levels sometime before the end of November. Two interesting things stand out. Firstly the index broke its long term trend line running up from 1990 in August this year. Significantly that comes at the fag end of a multi-year bear market; a sort of last hurrah by the bears. Secondly, there is a sort of triangle between this long term trend line and one dropped from the top of the last bull market. With the breach of the lower trend line, prices have fallen out of this triangle. That smells of a typical bear trap. All in all, the Shanghai Composite is nearing a bottom around 2300 end November.
Sensex:
Moves on the Sensex conform to what was detailed in the notes https://sonaliranade.wordpress.com/2011/08/18/market-notes-8172011/ . By my wave count we are currently in the sub-wave 4 up of the impulse wave down from 20,600 starting April this year. The index should come back to retest 15,500 area once again but Wave5s are prone to failure frequently. I would be looking at individual blue-chips and prices at which to buy them between now and mid-November. Not all stocks bottom at the same time. Some would have bottomed out already. Tough to call a bottom so the maneuver is not without some downside risk. However, many investors miss the bus by waiting for the lows to be repeated. Markets these days don’t give a second opportunity to buy or sell.
NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions.
sonaliranade 