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Azadi for Mumbai

February 27, 2012 12 comments

 

Mumbai stopped growing circa 2001. Its current population of 12.4 million people, half of whom now live in slums, is smaller than it was in 2001. That for Mumbaikars is the good news. The bad news is that despite the lack of burgeoning numbers, Mumbai’s problems in things like transportation, sanitation, water, air quality, and living spaces continue to deteriorate. Mumbai just went to the polls to elect a new civic administration. Only 46 percent of its denizens turned out to vote. No prizes for guessing that most of those who voted were from the slums. The other half chose to stay at home. If there is such a thing as the ‘Mumbai Spirit’, it does not extend beyond the middle and upper class drawing rooms to reach the polling booths. The question then is: why is Mumbai’s most enterprising class cut off from its roots in a city that gave it its dreams?

 
Mumbai once contributed almost a third of India’s direct taxes to the national exchequer. The ratio has fallen since the 1980s but is still close to 20 percent. In other ways too Mumbai is fabulously rich by India’s standards. In recent years it has yielded its place to other cities like Bangalore, Chennai, Hyderabad, even Delhi as the centre that attracts new enterprises because of its dysfunctional infrastructure and sky-high real estate prices. In fact, the world’s highest real estate prices are driving existing businesses out of the city. Job creating sectors like the software services, process outsourcing, call centres and the like have long deserted Mumbai for other cities. No wonder then that new immigration to the city has petered out. Nevertheless, Mumbai is still home to India’s financial services industry, Bollywood, the creative media world and a whole host of high value-added business that can afford to be in Mumbai despite its high overhead costs. But these are there for historical reasons and living off old investments in real estate. Could the city support such ventures at current costs? Mumbai faces an existential crisis that its denizens wilfully continue to ignore.

 
Mumbai’s citizens are not their own masters despite the trappings of a democracy. The national electoral constituencies have not been revised for population since the 1950s. Mumbai is grossly under-represented both in Maharashtra and at the Centre. The city was effectively captured by its hinterland after the formation of the Maharashtra state. Since the 60s, politicians from the Western Maharashtra farming belt have ruled over the state. And in the process, they have used Mumbai’s resources to develop their constituencies, underinvesting in the city’s infrastructure even as the city played host to poor migrants from far and near. Today, nearly six million of those poor migrants live in slums. They are there not for lack of resources within Mumbai or India but an utter lack of imagination in the city’s intelligentsia. The net result is that apart from corporate pressure on the government for business-related infrastructure, there is absolutely no pressure on the state and central government to reform its ways and address the city’s multifarious problems. Politics has failed Mumbai.

 
Mumbai’s problems are incorrectly diagnosed as lack of space stemming from its being a narrow island. That is a mental block hung over from the dark days when technology to build trans-harbour links was expensive or non-existent. Nine kilometres as the crow flies from the Gateway of India, is the mainland with unlimited spaces to spread out much like Delhi or even Pune. The first order of business in Mumbai is to create land through a trans-harbour link and bring down real estate prices relative to other major cities. Politicians with extensive real estate holdings in the city are understandably reluctant to reform. Nevertheless, the developed mill properties they hold will be sold out and they are buying land on the mainland. Mumbai’s intelligentsia needs to accelerate the process. This can be done by focused civic action.

 
To retain and attract high valued-added jobs, in design, engineering, creative media, financial services and entertainment, the biggest attractor is the quality of life offered to the people who work in these industries. Simply put, these relate to education, transportation, housing, and infrastructure. If Mumbai wants the best job and business opportunities available, then it has to offer the best it can in these areas. The problem is not as difficult and daunting as it looks. Each of these problems is fairly easily resolved if only we focus on them in a rational way.

 
To begin with, Mumbai needs to ‘defreeze’ its irrational land use policies and let the market forces play a role in promoting mobility within the city and within its society. Its archaic rent act, of which the government itself is the major abuser, needs to be abolished. Property laws need rationalising with reference to the modern mode of living and its governance. Modest but rational property taxes based on current market values, with no exemptions whatsoever, will generate powerful economic impulses for people to relocate within the city keeping in mind where their jobs and schools are and what their income is. As an incentive to the poor, all existing residents in the slums must be given marketable titles to whatever they live on with the freedom to either sell or exchange for apartments that could be built for them. The outgo on property taxes will also compel business to relocate to where they are viable economically. No bureaucrat needs to sit in on the judgement on who goes where. Businesses from eateries to carpentry, auto-repairs to fish sorting, all will relocate with profits to themselves. The Port Trust of India, faced with a tax bill on the market value of its holdings, will melt away faster than an iceberg in Mumbai’s summer. And all of this will bring property prices down sufficiently to yield enough of a surplus to build the trans-harbour link without too much strain.

 
Parking in Manhattan, New York, is about $ 16 per hour or about Rs 6,400 per day. The cost of parking a car at $ 40,000 per year is far more than the price of a new car and reflects the real cost to the city of providing that much space to it. Parking on Mumbai’s public roads is free! That illustrates the utterly irrational and wasteful way in which we price our facilities because we have not modernised our system with changing times. Funds for a world-class public transport system can be found by simply raising parking fees in a graded manner in the city. Likewise, on current costs no new school in Mumbai is economically viable. You would need to charge a tuition fee that exceeds the parent’s income for it to be so because of bloated real estate prices. The city needs to rethink schooling by zoning kids in each neighbourhood. Compelling Ambani’s kids to go to the same school as the slum dwellers in Cuffe Parade is a guaranteed way to get world-class schools in each neighbourhood. And it promotes real meritocracy by giving children equality of opportunity.

 
All this will not happen if Mumbai’s middle and upper class citizens will not take things in their own hands. So the first order of business should be to demand an executive mayor for Mumbai with full power over the city’s property laws, transportation, taxes, land use and the like. The mayor of Paris is usually the country’s next president. Why should Mumbai be any different? Azadi (freedom) should be Mumbai’s war cry!

 
The writer is a trader. She can be reached at sonali.ranade@hotmail.com or @SonaliRanade on Twitter

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Whitewashing Modi for the National stage

February 26, 2012 25 comments

Whitewashing Modi for the National stage

 

 

Narendra Modi is as much a prisoner of his support base as he is of his iconic image as the mascot of aggressive Hindutva.   Sometime back, speaking of Maoists, he said they were “our own people” which fact we mustn’t lose sight of in dealing with them.  There was a shrill hue & cry from his vast troll following on twitter as the press flashed the news.  Within a few hours Modi had to recant attributing the statement to a misunderstanding.  But if he is indeed a prisoner of his support base, then the prison is one of his own making.

 

 

Ten years is a long time to let bygone be bygones.  We Indians are anything if not forgiving.  Indira Gandhi was rehabilitated in less than five years after her rejection for the emergency she had imposed.  So if Modi is still unacceptable to a large majority of Indians outside Gujarat, the reason owes a lot to the perception that Modi has no regret for the carnage that occurred in Gujarat in 2002.  Instead he appears eager to wear it as badge of honor to massage his support base.  How can you forgive somebody who has not shown the slightest remorse for the tragedy that he failed to prevent?  How can one forget that 10 years after the tragedy, his Government selectively ignores the plight of victims and denies them just compensation, relief and rehabilitation?

 

 

Yet the attempt to whitewash Modi and present him as BJP’s national offering is well underway. Most of the argument coming from his supporters for his rehabilitation centers around two issues.  Firstly, that Modi has done a good job in providing a clean and efficient government in Gujarat stepping up its economic rate of growth.  Secondly, Modi’s detractors are unfairly targeting him and his vilification needs to stop.  After all, the nation forgave Congress the 1984 riots, so why can’t the same be done for BJP’s Modi.  Doesn’t Congress’ sponsored massacre of Sikhs in 1984 offset BJP’s pogrom of murdering Muslims in 2002?   Why should the BJP be unfairly hounded if Congress can be forgiven?  In the process there is an unsubstantiated assumption that Modi has hit upon some secret formula for economic reforms and growth that only remains to be implanted by his hands at the center.

 

 

 

Firstly, the growth story in Gujarat is nothing new.  Ever since its inception as a separate state from Maharashtra, Gujarat has been the second best performing State in terms of almost all development parameters.  If anything, purely in terms of growth, under Modi Gujarat has stepped up the trend growth rate from 11% pa to about 14% pa.  That is appreciable but nothing like the miracle it is touted to be.  However, one of the biggest developmental projects in the state, nay India, the Sardar Sarvovar Dam, was completed just as Modi came to power.  The dam changed the face of agriculture in the arid areas of Gujarat brining agricultural growth and prosperity to some of the poorest regions of Gujarat.  Modi had little to do with setting up the dam or fighting for its completion.  His predecessors did the hard work for the dam. Modi merely presided over the benefits.  Modi’s supporters, and indeed the national media, never stop to look beyond the headlines to determine where the growth in Gujarat is really coming from.

 

 

This not to deny that Modi runs a clean administration compared to most other States.  Gujarat’s single window clearance for industrial projects is a worthy initiative.  Nevertheless, to stretch that to assume Modi doesn’t need funding from the usual suspects to run and nurture his party or cater to the needs of his supporters is pure hogwash.  Modi hasn’t invented any new method of governance that either eliminates corruption or takes the State out of the business of businesses.  Nor has Modi’s record on economic reforms been exemplary.  In fact his Government has been at the forefront of blocking reforms.  He has held up the implementation of GST.  He opposed FDI in retail.  Apart from a certain efficacy in land acquisition, where some of the dubious deals like the allocation of a community water reservoir to Nirma, are coming apart, there isn’t much to showcase Modi as a reformer. On the whole Modi may be a good administrator but he is not the keen economic reformer that India needs.

 

 

 

Talking of being a good administrator, what is good governance?  The first duty, some would argue the only duty, of a government is to protect the life, liberty and property of all its citizens.  So long as a Government does that properly, the citizens themselves take care of growth.  Is it not that belief that underlies all economic reforms?  If so why are we tom-toming Gujarat Government’s role in development?  That’s not its business.  Its business is protecting the life liberty and property of its citizens.  Where does Modi stand on this issue?

 

 

The case against Modi is not that he is criminally culpable for the riots.  The case against him he is that he failed to anticipate and control the riots through various acts of omission and commission.  The standard of proof required to test him is not the “proven beyond reasonable doubt” kind required for a criminal conviction.  How do we judge if the District Collector of a district has done all that was required of him to maintain law and order before taking administrative action against him?  Are Collectors taken to court and does a judge pronounce on the their guilt or is such an assessment made by the collector’s superiors in the executive branch on a balance of evidence available to them?  Did Modi do enough to control the riots is not a question for the courts.  It was a question for his then superiors; viz. the Prime Minister acting through the Governor.  What did Atal Bihari Vajpayee have to say about Modi’s handling of the riots?

 

 

It is a matter of public record that the PM was extremely unhappy with Modi’s handling of the riots and the aftermath.  He admonished Modi in a public meeting in Gujarat.  He expressed his unhappiness in a party enclave in Mumbai where Modi supporters booed him.  Electoral politics prevailed over the PM’s unhappiness and instead of Modi stepping down to facilitate an impartial inquiry into the riots, as was the prevailing norm until then, Modi was allowed to continue and lead the party in state elections.  The rest is history.  Democracy failed in Gujarat because rule of law was given short shrift in preference to electoral politics.  In a democracy rule of law must always have precedence over electoral politics.  Else the paradox that we face in Gujarat becomes the norm.  Is there any doubt that Modi botched his job in the 2002 riots?

 

 

Ten years after the riots Modi’s barely concealed animus for the victims of the riots is there for all to see.  They have been denied justice.  Instead of facilitating an impartial inquiry into the riots Modi has done his best to subvert them, even destroying evidence in the process.  Upright police officers are being hounded.  Victims have been denied compensation and rehabilitation.  Their properties snatched or destroyed during the riots including shops and the like have not been restored.  Does that appear to be the behavior of a concerned CM who erred but is anxious to restore peace and harmony and redress grievances?  Contrast Modi’s behavior with any other riot elsewhere.  Never has a CM so brazenly defied every cannon in the administrative books about what needs to be done post-riots to rehabilitate people.  Modi in fact wears this as his badge of honor.  It is his ticket to the rabble that so vociferously supports him.

 

 

Distrusted and shunned by his own party, Modi needs the support of the extreme right within his party to climb up the organization and claim the right to represent it in the prime ministerial stakes.  Before Modi has cemented his claim as the BJP’s prime ministerial candidate, he can neither be contrite about the 2002 riots nor reach out to the minorities in a spirit of forgive and forget.  His Sadbhavana fasts were just a test of how far his support base would let him go in softening his hard Hinditva image. Modi will have to make amends for the 2002 riots if he wants to play larger role in the nations politics.  There is little doubt that he will do so after he is sure about his place in the BJP scheme of things which are far from clear now.  How far he can carry conviction with the people outside Gujarat is a matter for conjecture.

 

 

The Modi affair is not about any high principle but simple cynical politics.  If his detractors are no angels Modi is no paragon of virtue even by our lax standards for politicians.  Ours is a young democracy, rather half-baked.  We have still not understood that democracy simply cannot survive without rule of law taking precedence over politics.  Modi personifies the paradox that we as a society are not yet ready to deal with.  Just as 1984 has been used to justify 2002, there will be another Modi elsewhere getting ready to justify his pogrom for a ticket to electoral nirvana.  The danger is that with each such strain, the fabric of our young polity is stretched beyond its endurance.

 

 

We may not succeed in stopping the Modi or the phenomenon that he embodies.  Nevertheless, if our secular democracy is to have a future, we much strain every nerve to see that justice is not only done but also seen to be done. What is important is not that Modi be stopped.  What is critical is that the minorities be reassured that the majority will not allow its extremist members to discriminate against minorities nor allow their rights to be compromised.  This battle is not about Modi.  It is about cementing our future as open, just, liberal society.

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MARKET NOTES: The time is up for this rally in risk assets.

February 25, 2012 1 comment

 

MARKET NOTES:  The time is up for this rally in risk assets.

 

S&P 500:  My target for the current rally in US equities was 1370, noted in my blog weeks back when markets were very bearish and the thought of a rally unthinkable.  Using the same wave count that led me to predict this rally, the time for this rally to peak runs out on 28th February, give it a few days here or there.  With the price target achieved, and time factor supporting the view that 1370 overhead resistance will be difficult to breach in a meaningful way, I have to conclude this rally is pretty much over.  A correction in the indices is due any day now.  The correction could be relatively flat.  The nature of the correction that unfolds will tell us if we are in a new bull market for risk assets or if the bear market continues.  Either way, best to be prepared for a fairly long, if flat, correction in values.

 

 

Gold:  Cash gold is currently priced at $1779.  It has a major overhead resistance at $1800, a breach of which would invalidate my preferred wave count that holds that the $1798 high on 7th November was beginning of wave2.  Considering that gold has been correlated positively with risk assets of late, the metal’s sharp rally in line with equities and oil, is not surprising.  Hence, I continue to bearish on the metal, the sharp rally notwithstanding and will revisit my wave count if the resistance at $1800 is meaningfully breached.

 

 

Silver:   I normally do not bring in Silver into my analysis because the metal is too volatile for a position trader like me who initiates a trade with a change in intermediate trend and ends the trade also with a change in that trend- a strategy that minimizes transactions, costs, and beats the traps professionals lay for day traders.

 

Silver is strongly positively correlated with gold.  So the silver chart is a good place to look for CONFIRMATION of my wave counts for gold.  A look at the Silver chart is very educative.

 

Silver made a top at $49.5 on 28th April last year a few months before gold similarly topped out in August.  Silver made a low of $26 on 26th September and again on 29th December from where it has rallied to $35.75.  Despite the screaming headlines of a breakout, there is no such thing on the charts.  On the trend line connecting the previous two tops Silver would have to rally to $37 for a break out.  To be on the same footing as gold, when gold breaches $1800, Silver would have to rally to $43.5, a price clearly out of the question at the present juncture.

 

Going by the structure of the chart formation & the current price of Silver at $35.37 I would conclude that the Silver price behavior confirms my bearish read on gold.

 

 

NYMEX Crude:  Crude is currently priced at $108.66 having decisively pierced through its major resistance at $104.20.  The next logical target for crude is $115.  [The corresponding Brent crude price at that level would be $135!]  Going by my wave counts, Crude prices could remain elevated till the first week of April.  So crude has more time to rally than other risk assets.

 

With geopolitical risks driving crude prices, it is hazardous to say where crude will go.  But going purely by technicals, the long-term bearish trend in crude will be negated on a decisive breach of $115.  That probability can’t be ruled out.  An alternate wave count that I don’t favor, but which would be validated on a breach of $115, says crude could be as high as the previous top of $148 by end of June this year.  To repeat, I don’t favor the latter wave count right now.  But a breach of $115 decisively, would bring that wave count into play.

 

What crude at $148 would do to equity markets is a no brainer, especially for India.

 

 

Sensex:  Sensex has a major overhead resistance at 19,000 followed by more over-head at multiple levels.  On the charts, the Sensex has room to make a bid for this level in terms of time.  This index normally doesn’t descend without multiple bids at establishing a top.  So despite the correction over the last few days a renewed bid at 19,000 cannot be ruled out.  Having said that, am not very bullish on the Indian market never mind the much-touted FII inflows.

 

Telecom stocks in the Indian market have completed a long 3-year correction.  While they could dip with the broad correction in the markets, their downside is limited.  These stocks would be worth accumulating in any fall.  I would however stick to market leaders and blue chips only.

 

 

$-Index:  The $ continues in a tame downtrend from its recent top at 82 and is currently positioned at 78.5 after a correction for the first leg of the fall from the top.  Effectively, the $ is now in wave3 down move with first logical target at 76.5.  It will not be a straight fall but the direction appears clear enough.  A fall below 78 will confirm violation of the upward sloping trend line from the bottom 73.77, end August 2011 accelerating the fall.

 

 

 

Euro-$:  I have been a Euro bull from its recent bottom at 1.26250 despite all the Greek drama played out in the markets.  The Euro crossed its first major overhead at 1.335 with a flourish and is currently positioned at 1.3450.  The Euro has no significant resistances from it current level and 1.370.  On the other hand a clear break above 1.370 will signal a major change in the main trend for Euro from bearish to bullish bring in more support.  There is little to stop the Euro from 1.370 level barring the usual corrections.  A short squeeze could further accelerate the Euro’s rise.  Considering how negative sentiment has been, that is very much on the cards.

 

 

 

$-INR:  The $ having turned up against the INR from its recent bottom at 48.6, rallied to its major overhead resistance at 49.75 and is currently correcting for that move.  It closed at 49 last Friday.  On crossing the first overhead resistance at 49.75 INR is likely to head for 52 level.  My wave counts indicate $ is in a well established bull run from its bottom of 44 in August 2011 and may be looking at 54-56 range before the end of May.  Watch for a break out above 49.75.

 

 

 

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.

Categories: Uncategorized

India’s gold fetish

February 21, 2012 2 comments

 

India imported 958 MTs of gold in 2010 and something over 1,000 MTs in 2011. Assuming gold price at $ 1730 per ounce, the value of gold imports in 2011 was $ 57.56 billion. In contrast, considering India’s GDP at $ 1.4 trillion, India’s fiscal deficit for the year 2011 is expected to be around $ 91 billion. In other words, over 60 percent of India’s fiscal deficit goes to stimulate the world economy and only 40 percent results in some enhancement to domestic aggregate demand. Were the fiscal deficit to be pegged at 4 percent instead of the present 6.5 percent, gold imports would completely offset any stimulus to the domestic economy by their deflationary impact. Little wonder then, our GDP growth has been falling since 2008 as gold imports picked up in line with the uptrend in world prices of the metal. In the same period, GDP growth fell from about 10 percent to about 6.9 percent in 2011. Sure, gold imports are not the only factor, but their deflationary impact on the economy can no longer be ignored in policy making. That is but one side of the equation.

 

India’s total goods exports in 2011 are expected to be $ 250 billion while total imports, of which gold is one part, are expected to be $ 370 billion leaving a trade gap of $ 120 billion. Of the total imports, $ 104 billion is oil followed by $ 57.56 billion of gold. Net export of services, which includes software exports, etc, contributes $ 49 billion, reducing the trade gap to $ 71 billion. This gap is financed from external sources like the FDI, FII inflows and NRI deposits with banks. These together are expected to total about $ 60 billion, leaving an uncovered gap of $ 12 billion to be met by drawdown of reserves.

Going forward to 2012, while imports and exports will remain of the same order of magnitude, repayment obligations in 2012 will shoot up by an estimated $ 20 to $ 30 billion. FII and FDI inflows may actually drop as the economic growth rate continues to slide. Gold imports exceed software services exports. In fact, the value of gold imports now exceeds the total quantum of investment inflows into the economy by way of FDI and FII. Our domestic investors are selling future profits of Indian companies to foreign investors to buy gold. That is a swap that seems certain to lose money for the domestic investors over the long term.

Clearly, considering the deflationary impact of gold imports on the economy, as well as the need to finance them, the import of gold at the current levels is unsustainable. To understand what can be done to reduce the incentives for gold imports one needs to consider why they happen in the first place. While there is little doubt that some of the gold imports are for consumption in the form of jewellery, a bulk of the incremental imports since 2007 — around 600 MTs — are for investment purposes. It is this component of the demand that the Reserve Bank of India (RBI) needs to focus on.
Indian experience with fiat currencies is recent. Prior to the British rule in India circa 1880, there was never any fiat currency worth the name. Gold and silver coins, stamped by a local sovereign to attest purity and weight, served both as currency. More importantly, there were no banks before the British established them in the 1900s. Only moneylenders existed. If you needed to save money, there was only one way to do it — collect gold coins or jewellery. No other alternative existed unless you went into business yourself or bought more property. With property came the political risk of expropriation and worse, in addition to taxes. Hence the preferred method of saving was to horde gold and silver. Buying gold and silver was synonymous with saving for the future in the Indian culture for centuries right up to the 1900s. We have done little to change that culture through education. Little wonder then that the demand for gold, even if it is known to be ruinous for the economy as a whole, is insatiable.

Distrust of sovereign power is ingrained into our historical psyche and rightly so given the numerous invasions, local wars, multiplicity of small principalities and the capricious nature of the rulers who ruled. Gold and silver were sovereign-proof and easily concealed. While the British went about establishing a fiat currency in India, they took care to fully back it up with gold in India itself. Right up to independence, the Indian rupee under the British was fully backed by gold and indeed some of the earlier coins of the British Raj were in gold and silver species. One of the first acts of the Indian government after independence was to abolish the gold standard. Who is to say that the domestic investors are wrong about not trusting the government with their money?

If bank deposits and the Indian banks are to be trusted with household savings, then the minimum that they can do is to give the investors a return on bank deposits that exceeds the total return on gold over a period of time by way of capital appreciation adjusted for storage costs. Unfortunately, the banking system spectacularly fails to meet this test. On an average, inflation has exceeded the nominal interest rate by some 500 basis points, eroding the real value of bank deposits in relation to gold that usually occasions no capital loss. Why then would savvy households trust bank deposits over gold even if speculative demand occasioned by rising world prices is ignored?
The RBI must proactively think in terms of creating an institutional structure for comprehensive management of gold in the domestic economy. Given the deregulation of all interest rates, the RBI has considerable leeway in using markets to create a market for gold that minimises the use of physical gold as an investment vehicle while being transparent to all investors.
The RBI should set up Gold Bank of India, which would take in deposits in gold and also lend gold against adequate collateral to other banks and institutions. It would have complete freedom to import or export gold. The Gold Bank would also write hedged call and put options on gold of suitable maturities, which would be traded on the NSE/BSE. The gold held by the bank would be independent of the official gold reserves. In return for taking in gold deposits, the bank would charge a safekeeping fee or offer interest rates determined by its reading of the market. Likewise, it would charge interest on loaning out of physical gold. The accounts of retail depositors could be held at authorised commercial banks. To separate this market from the normal rupee market, gold deposits would have a minimum maturity of one year with no option of premature withdrawal. So gold will not replace the rupee as currency.
Gold deposits will have to compete with bank deposits of corresponding maturity for business. Any mismatch would set up arbitrage that would be exploited in the markets. This link between physical gold and bank deposits will prevent the RBI from setting interest rates out of sync with inflation. It will also reassure the investors that the returns on bank deposits are in line with long term return on gold. The gold bank could begin with 100 percent reserves against deposits and reduce them over time as it gains more experience. There is no additional outlay on gold imports since the demand for gold is met from imports anyway.
To the extent education and experience can reduce the demand for physical gold; the savings to the economy from reduced gold imports could be phenomenal. That may be one creative way to make a virtue of an adversity for the RBI.

 
The writer is a trader. She can be reached at sonali.ranade@hotmail.com or @SonaliRanade on Twitter

Categories: Uncategorized

MARKET NOTES: How far will this rally on the Sensex go?

February 19, 2012 Leave a comment

 

MARKET NOTES:  How far will this rally on the Sensex go?

 

 

 

This post should be read with the last post on markets.  This adds some more detail to the comment on the how I see the Sensex playing out this bear rally.  In particular, how the rally can extend much beyond what I projected.  It doesn’t mean I would chase the rally from here.  This is merely a reminder to trapped bears that there is no easy way out of this one.

 

 

 

CNX Bank Index:  In terms of time, the bank index drop from its top at 13,229 has to 8,000 has lasted almost exactly the same period as the fall from the top of 10,780 in January 2008 to the bottom at 3340 end March 2009.  Yet, relative to the trend line from bottom in September 2009, to 3340 in March 2009, the bank index hasn’t fallen all that much in terms of price in this correction.  While nothing dictates the index should test this trend line, the correction in bank stocks has been relatively shallow.

 

On the other hand, in an alternative wave count, starting from the bottom 748 in September 2001, to the top at 13,340 in November 2010, the banks have had a humongous bull run spanning 8 years.  In terms of wave counts, this Bull Run yields a complete set of 5 waves.  A fairly long correction in bank stocks is therefore in order.

 

Assuming, the current rally is a corrective to the fall from 13,229 to 8000, the bank index rally can stretch till end March, or even June.  Where does that take it in terms of price?  The index has a minor overhead resistance at 11,400 followed more overhead at 12,000.  Given the need for the index to spend time in this region for a while, a spike above 12,000 can’t be ruled out.

 

Overall, while not bullish on bank stocks, if a bull, one should keep ratcheting up the stop loss.  The time to play bear is definitely not now.  Early bears are easy meat in such rallies.

 

 

 

CNX IT Index:  represent the real joker in this rally that could surprise bulls and bears alike.

 

A simple wave count from the top of 7574 in January 2011 to the bottom at 5100 end August the same year, represents a corrective down wave that is being offset buy the up move from that point to date.  It’s been a jagged but orderly up move.  Wave A up, a full blooded two part wave B down and we are into wave C of the up-move that can last till march end and in fact also extend.  Given the time element, and the performance in A and B of this up move, the previous top at 7600 looks easily attainable.

 

Note what I said about the NASDAQ in the previous blog post.  We have a confirmed breakout on NASDAQ after 11 years and that has sometime to run in the US markets.  Very likely, as in the past, our universe of tech stocks will start tracking the NASDAQ as has happened earlier.  In which case the rally in CNX IT Index has the time and the structure to run for a while unlike the bank stocks above.  Can the tech stocks carry the entire market?  Short answer is yes.  They have done so in the past.  That is one reason to disaggregate my views on the Sensex this week.  Tech stocks can spring a surprise on the index as a whole.

 

 

 

Telecom Stocks:  There is no telecom index in the market.  So using a proxy for it.  Bharti made a top of 563 in October 2007 and has since been correcting for its entire bull run from September 2003 to October 2007.  Counting the down waves in several different ways from the top of October 2007, the correction in this stock is completed at a level of 320 in September 2012.

 

Ironically, the stock is actually correcting downwards.  Telecom stocks could turn on a dime from current levels.  They have always tended to be correlated with tech stocks.  Hence the time for some fairly sharp break outs in telecom stocks could be nigh.

 

Warning.  This is not, repeat not, a recommendation to go out and buy telecom stocks.  The attempt here is simply to see which stocks in the Sensex or nifty COULD sustain this rally beyond the normal that one would expect in a bear rally.  Telecom stocks make good candidates.  That’s all.

 

 

 

CNX Pharma:  Pharma stocks tend to be contrarians in most markets. India is no exception.  They are however not stocks one trades.  They are mentioned here only to assess their impact on the index since they are contrarians.

 

Pharma stocks have had a phenomenal Bull Run spanning from April 2001 to December 2011.  In the immediate past, a huge surge in the stocks led the rally from 1968 on CNX Pharma in April 2009 to December 2010.  The stocks have paused to correct from that perspective.

 

The first leg of the correction has taken the stocks from 5200 on the index to about 4400 at the end of August.  We appear to be in the corrective wave up that could time with the current rally in the markets.  So Pharma stocks may well move with the markets but are unlikely to lead or lag significantly.

 

 

 

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.

 

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MARKET NOTES: How far can this rally go in time and price?

February 18, 2012 2 comments

 

 

MARKET NOTES:  How far can this rally go in time and price?

 

 

Bear market rallies, and there is no doubt in my mind that this is one such, are notoriously fickle and hard to predict in terms of price and time.  Being driven by trapped short covering, their momentum is determined purely by market technical positions, data for which one is not privy to.  Hence we have to look across markets for tell tale sign of exhaustion and other similar clues.  In terms of trading strategy, that means taking your profits when your target is met and having the self-discipline to stay out of the market till such time the market clearly says which way it is going.

 

But first we must reestablish that this is indeed a bear rally for the rest of the thesis to be valid.  Hence a look at the NYSE Composite Index that represents the entire universe of stocks on the NYSE, but also one traders rarely look at for reasons I can fathom but not guess!

 

 

NYSE Composite:  This index made an all time high of 10,395 in October 2007.  In the following crash it made a low of 4186 in March 2009.  It has since rallied making a high of 8700 in March 2011.  What is significant about this March 2011 top is that [a] it matches a very strong and significant overhead resistance spanning from May 2006 to date and [b] the level achieved is much lower in relative term from the 2007 top when compared to say DJIA or the S&P 500.  In other words the broader universe of stocks on the NYSE did not rally as much as the main indices in May 2011.

 

From the top at 8,700 in May 2011, the index made a low of 6,420 in October 2011.  We are in the rally from that started from this point and the question is how far can it go until we are out of the bear market completely.  A trend line from the top in 2007 to the top in May 2011 makes the equation obvious.  The NYSE Composite index can rally up to 8,500 before long term buy & hold kind of investors start fretting about being left out of a bull market.  We are currently at 8,100 well below the point.  Note other indices are like the S&P 500 and the DJIA are much closer to the corresponding point on their charts while the NASDAQ has actually broke out.  However these indices are narrower than the NYSE Composite.  My sense is that the above confirms we are still in a bear rally.

 

 

NASDAQ:  As indicated in the last blog post, this index is the most bullish component in the market indices, and within it, the sub-universe of tech stocks shows the most momentum, the darling being Apple.

 

Apple had a key reversal day on 15th February accompanied by a volume that was the highest in recent months and roughly 8 times the daily average.  It has clawed back about half that loss on much reduced volume.  Nevertheless, the probability that Apple has reversed course after a long and ferocious parabolic run up remains strong.  That’s a sign of what may be in store for other tech stocks as well.

 

Returning to the index, as indicated in the last blog post, NASDAQ has a target of 3050 on the charts followed by more significant overhead at 3200.  As far as the NASDAQ goes, I am inclined to the view that the index completed its correction from the peak of 5150 in March 2000 on 9th March 2009 and the rally that we are seeing on the NASDAQ is the first leg of a new bull market in tech & biotech stocks.  This hypothesis would support the significant break out after 11 years on this index.  If my view is correct, NASDAQ can peak around 3200 in the 2nd week of March before correcting for the rally up from March 2009 lows.  In short, while NASDAQ has broken out bullishly, it will nevertheless correct with the rest of the market, only the nature of correction being different.

 

 

 

S&P 500:  My target for the index was 1350 which as been achieved.  The index’s previous top stands at 1369.  There is no reason why that cannot be breached but if it does so, it would be a surprise.  After the 1370 area, significant overhead holds at 1427.  Breaching that resistance would be heroic miracle.  But there is nothing on the charts to show exhaustion.  I plan to stay out of the market regardless of where the S&P 500 goes.

 

 

$-Index:  The $ is stuck around 79.5 waiting to see how the Greek cookie crumbles.  The index has an overhead resistance at 80.5 and it could spike into that area on a Greek default.  Barring that, the index continues to be in bear trend down into the 76.5 area.  A spike on Greek default will not change the overall trend.  Nice trading opportunity coming up here.

 

 

10YR US Treasury Notes:  This index made a top 132.281 which looks suspiciously like a triple top in that area and is now headed down to the 130 area.  Track this closely because a break below 130 will ring in a worldwide reversal in interest rates.  The index currently stands at 130.984.

 

 

Euro-$:  The Euro-$ currently stands at 1.3150.  If there is a Greek default, one has no clue where the Euro will be at; but it will in time emerge stronger, not weaker, on a Greek exit.  Therefore any collapse would be a buying opportunity in my view.  Having said that, with such a huge event risk, the best position is 0-0.

 

 

INR:  The $ is on the way up against the Rupee in its major trend.  However it turned down from 49.77 into a short-term correction.  In my view this correction is unlikely to breach 48.5.  In terms of time, $ would be ranged between 48.5 to 49.8 for some more time before it makes a break for higher levels.  The $ has a definite upward bias though.

 

 

Gold:  One would have expected Gold to show some pulse with rumors of an imminent Greek default.  Instead Gold continued in a rather lame and tame descent and is currently at $1722.  If Gold can’t rally amidst a major currency default, there isn’t much to hold the metal here at these elevated prices for long.  Maintain my bearish view.

 

 

NYMEX Crude:  Crude closed the Friday session just under its breakout point at $103.75.  Its next major overhead lies at $110.  While I am bearish on crude a spike in the event of turbulence in the Middle East can’t be ruled out.  Incidentally, crude is poised at a potential triple top in the 103.5 area.  A spike would negate that however.

 

 

Shanghai Composite:  Chinese stocks continued their steady, boring march up after confirming 2323 as the new higher floor.  Expect nothing spectacular in the index in the early stages of a rally.  Continue to be bullish here with the caveat that the index will adjust its pace & moves to what happens in world markets, but with a bullish bias.

 

 

Sensex:  Sensex illustrates the hazards of calling bear rallies!  First, it gapped up from 17,880 to 1800 trapping the wretched bears and yanking them all the way to 18,200.  Many would have got butchered.  Then after a one-day correction, it gapped up again from 18,160 to 18,400 before closing down 18,290.  That reads like a absolutely gory tale of bear slaughter.  It also means these are exhaustion gaps; or a way of substituting acceleration for actual price moves upwards signaling the end is nigh.  Hard to say when the last bear will be quartered and killed but rest assured no bull wants to hold stocks at these levels.  Till the market says otherwise, am bearish on the Sensex.

 

 

 

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.

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ANALYSIS: Fighting inflation the wrong way

February 14, 2012 1 comment

 

Headline inflation peaked at 9.4 percent in December 2010. India has spent almost the whole of 2011 fighting inflation with interest rate hikes and has wrestled down headline inflation from 9.4 percent at the end of 2010 to 7.5 percent in December 2012 — a reduction of 1.9 percent. This has been achieved by bringing down overall GDP growth rate from 9 percent to 6.9 percent — a reduction of 2.1 percent. Has the battle against headline inflation succeeded? Inflation is far from licked. In fact, a more detailed look behind the aggregate numbers shows a shocking failure to diagnose the problem correctly. Moreover, the policy tools in use, mainly interest rate hikes, are unlikely to bring down inflation much further. Is India then looking at another wasted year in 2012?

First consider inflation. The biggest component of headline inflation has been inflation in food prices. This has consistently topped headline inflation, but for the seasonal fall in food prices in winter that lowers the prices of vegetables, etc. In fact, inflation in food prices has turned negative for the last two months indicating a fall in prices of agricultural produce. Manufacturing inflation continues to be high at around 6 percent and has not abated. The government itself is not sanguine that headline inflation will be any lower than 7-8 percent by March end this year. As India heads into summer in April, food inflation in all probability will pick up. Fighting inflation is going to be a Sisyphean enterprise for the Reserve Bank of India (RBI) alone.
The RBI has not been candid about the cause of Indian inflation beyond talking vaguely of the need for fiscal consolidation. Nor has the RBI chosen to focus on core inflation, which is inflation after food and energy prices are stripped out of headline inflation. This number roughly represents the growth in wages to all labour in the economy over and above the actual increase in its productivity. The government has been rapidly increasing the nature and scope of its poverty alleviation programmes such as the National Rural Employment Guarantee Scheme that has resulted in some Rs 600 billion flowing into wages to labour while getting little by way of output, growth, or productivity enhancement in the economy from such doles. In fact, through various other such doles, such outlays may actually double in the coming years.

What these doles collectively do is to increase wages to ‘labour’, putting more purchasing power in their hands without any corresponding increase in output in GDP. This purchasing power translates into demand for wage goods like food. With little or no growth in agriculture, which has at best grown at 2 percent per annum against a population growth of 1.5 percent, food inflation is inevitable. Furthermore, wages under schemes like the National Rural Employment Guarantee Act (NREGA) are indexed to inflation and will automatically increase as food prices increase. This higher wages chasing a stagnating output sets off an inflationary spiral that simply cannot be addressed by increasing interest rates on such things as housing loans to the middle class or loans used for investment in infrastructure. To the extent hikes in interest rates actually cut off investment in infrastructure, the RBI is limiting both GDP growth and productivity gains, the only two things that can actually help sustain the increase in doles to the poor. Clearly, interest rate hikes do not address the wage goods inflationary spiral.

Political paralysis on the other hand has meant that the government cannot do any of those things that can result in enhanced growth and productivity in agriculture. The entire agricultural supply chain from harvest to retail shops is riddled with small oligopolies, waste, and graft due to government intervention, under-investment and inefficiency. Measures such as easy means to lease land by corporate farms to catalyse investment in food production, permitting foreign and corporate investment in agricultural distribution and marketing, cold storages and warehousing are the crying need of the day. However, unimaginative politics and vested interests have stymied necessary reforms. We need reforms that can unleash a second wave of productivity growth at the heart of the economy that will enable us to sustain the poverty alleviation programmes. Without them, enabling doles that help people graduate from poverty into participation in the market economy are unhelpful. An effort to sell reforms is conspicuous by its absence.

RBI’s other preferred measure to fight inflation is fiscal consolidation by the government. It is something a government obsessed with doles to buy votes has paid scant heed to. There is great danger in applying IMF orthodoxy to our problems without deep consideration. Just as fighting a supply side, wage inflation fuelled by doles is not the right response, fiscal restraint should not cut off (a) needed investment in things like infrastructure that accentuates supply bottle necks and (b) reduce the stimulus needed by the economy to offset a high level of private savings by households that include ruinously deflationary imports of physical gold.

Instead, fiscal consolidation must focus on two areas that hold  the largest potential for success. By policy creep, more than design, oil subsidies that go largely to the middle class have ballooned by the failure to fully pass through the increase in crude prices. There is simply no sense in subsidising a scarce imported commodity’s consumption by the middle class. The government must bite the bullet and raise domestic prices of POL products consistent with international prices and enable automatic pass through. This measure alone can offset the outlay on NREGA. It has the added attraction of productivity gains as the economy learns to make more efficient use of a mispriced resource. Productivity gains through more rational pricing have been huge in other economies abroad.

Policy creep and playing to the gallery have reversed the growth in tax to GDP ratio for the economy as a whole from 14 percent to something like 11 percent. This crucial ratio is now back to the level when the economy was bogged down in the Hindu rate of growth at 3 percent. The fall in the ratio needs to be reversed. India has far less government than its size requires, which is why we are seeing the state cede space to anarchy, be it in terms of police services or general governance. On any measure of government to population ratios, our government is too small to be effective. That does not mean we hire more deadwood. But it does mean that the state step in where markets fail to provide the required level of investment in things like education, healthcare, infrastructure, water, sanitation and the like. For that to happen, the government needs to raise more taxes, not by upping tax rates but by widening the tax base. Direct tax exemptions need to be whittled down and GST implemented on a war footing.

Last but not the least, India needs a dream that lends coherence to reforms. That dream should be rapid but planned urbanisation in place of the chaos that prevails today. There is no point in pretending that we live in villages. We do not. We have outgrown our villages by our sheer numbers and are spawning ghettoes where another ‘village’ begins before the other ends. Reforms in land acquisition and use, urban planning techniques, expansion of housing and related infrastructure can put the economy into an entirely different growth orbit where double digit growth will seem just plain ordinary. We have just about everything in place to adopt such a strategy for growth — everything except the government with the imagination to grab the opportunity and gumption to make it happen.

The writer is a trader. She can be reached at sonali.ranade@hotmail.com or @SonaliRanade on Twitter


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