Sunday, May 31, 2009

Markets: What next?


Its been an amazing few months, with a rally of almost 77 pc on the Nifty.

The next few triggers are:

1. Good monsoons
2.Pre-Budget Rally.

The point to note about the budget is that it will be in the first week of July.Expectations are being built in sky high from divestment to FDI in Retail and what not.

Usually, when such high expectations are built in they tend to disappoint.

Prudent strategy would be to book profits on every rise.

At 4448, the Nifty is at a trailing P/E of 21.

Till the budget, the likelihood of a severe correction is less.

On the global front, the US treasury yields are soaring as more money moves out of Treasury and moves to riskier assets. High yields on US treasury is bad news for the US.

The markets rose when US money came into emerging markets.

The markets will fall when that money moves out.

The money will move out only, if US goes into a relapse.

It would be worthwhile keeping an eye on the US economy.

The government has to keep in mind the fiscal deficit. It has been fun dolling out the goodies, but the price for it, someone has to pay.

Prudence suggests to be cautious and keep a trailing stop loss.


Saturday, May 23, 2009

Elliot Waves and the Sensex

This week I thought I would take a break from Fundamental Analysis and talk a bit about the Elliot Waves.

More about Elliot Waves can be learnt from

What are Elliot Waves?

The Elliott Wave Principle is a detailed description of how groups of people behave. It reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific and measurable patterns.

One of the easiest places to see the Elliott Wave Principle at work is in the financial markets, where changing investor psychology is recorded in the form of price movements. If you can identify repeating patterns in prices, and figure out where we are in those repeating patterns today, you can predict where we are going.

The Elliott Wave Principle is named for its discoverer, Ralph Nelson Elliott.

I have been fortunate to have interacted with Spandan Joshi, who is a Master of the Elliot Waves. I would like to acknowledge his immense support and enthusiasm in goading me to learn about Elliot.

The below analysis draws a great deal from his studies.

Elliot Waves are typically consisting of 5 waves, with 3 waves going in the upward directions and 2 waves retracting. Post this, there is a corrective A-B-C wave structure.

The corrective waves correspond to the Fibonacci retracement levels of 23.6 % or 38.2 % or 50 % or 61.8 % or 74 % or 89%.

The current bull run began in Sept 2001 at Sensex levels 2598 and the 5th wave ended in last Jan at 21206.

The corrective A-B-C structure began then onwards.

A and C would be downwards and B upwards.

A began 21206 and ended at 7797 in Oct'08.

B began at 7797 and would end at 38.2%, 50 % or 61.8% levels of the entire A wave.

Length of A = 13409 points.

B if = .382 = 12919

if = .5 = 14501

if = .618 = 16083 or higher.

We are currently in this B up move presently.

B again has 3 legs A, B and C, A and C upwards and B downwards.

B-A has been ongoing from 7797 and if we consider it to end at 14939 after elections then B- B would take us to 12157, 11368, 10526.

Post this we would see the final rally of B-C to maybe 14501 or 16083 levels.

Then the wave C would take up back to sub 10000 levels. Anywhere from 9500 to 5000 levels.

In a nutshell, we may rally upto 16000 before falling back to 5000-9000 levels on the Sensex.

Please note the Elliot targets appear fantastic, but events do happen which make those levels appear.

I didnt believe Spandan when he spoke 8000 levels when Sensex was at 17000.



Monday, May 18, 2009

P/E Study: Past history

I did a study of the Nifty P/E Ratios from the NSE site.

What is a P/E ratio? It is the price to earning ratio. It is the number of times premium you are willing to pay for a current year profit.

Another thumb rule is your P/E ratio should be the % growth expected.

IT stocks had a P/E well in excess of 50-60 during their golden years.

On Jan 8th 2008, when the bull market peaked the P/E ratio was 28.3. In Oct'08 it bottomed out at 10.58.

During the period September 2007 to Jan 08, when the market got overheated, P/E was between 21 to 25.

At the time, world economy was motoring along.

Now, how much is the P/E now?

At Nifty 4300, a P/E of 20.5.

If you are expecting a growth of 21 pc going forward, then buy else sell and stay out.

21 pc means, basket of Nifty stocks will show a growth of 21 pc Y-0-Y.

Saturday, May 16, 2009

Elections over: What next?

The public has voted. All the votes have been counted and the winners take away the spoils. It was the best possible verdict (other than clear NDA victory).

The people who held the country to ransom have been shown the door. Manmohan Singh has proved to be a much better politician than most. First the nuclear deal and then this. If we break the results down, the Congress has won mainly because of UP, Kerala, WB, rajasthan and AP.
The real surprise has been AP and they deserve to win, they saved Satyam. Satyam going down would have been real bad news for Indian IT.

The real worry is now that the Congress should not fritter away this mandate like they did in 1984. The next big event lined up domestically is the Budget and the Monsoons. Busget will take at least 2 months to be prepared, and good monsoons should be here in a months time.

Domestically, things seem to well settled now. The Budget would be interesting because all the freebies will have to be balanced out.

The only missing puzzle are global cues. This rally has been fueled by FII money and till they stop pumping in, the markets will keep rallying.

Monday, the markets will gap up 700-800 points. Now, what do you do at this point?

Typically, it is classic sell on news. The smart money had already poured till this stage. At 13000 sensex, nifty 3950, the trailing P/E would be around 19.

Just look at the charts after the Nuclear deal vote of confidence, the markets peaked the next day. We still have not reached nifty 4620 after that.

It would be best to wait for markets to cool in. It would now be retail money jumping in. They are typically the last to get in. There would be definitely corrections on the way.

If the global cues, remain good we are headed to 14500 by July (factoring in good monsoons, which they should be, after all monsoons have failed only only 1-2 times in last 20 years).

If I had bought at lower levels, I would book some profits.If I have not bought, I would sit quietly. The markets always remain here. They do not go anywhere. Markets always give everyone a chance to buy.

There would be a dip after the euphoric rally on Monday.

I would wait for that dip to buy.

Remember the primary goal of investments should be capital preservation. At 13,000, valuations would look stretched. (8K to 13 K in 2 months)

For the moment, time to celebrate.

Saturday, May 9, 2009

GM Results, Stress Test results and Great Expectations

This was an eventful week in the US. This week probably sowed the seeds of a bear market rally in the US for at least till the end of June.There are several factors for this.

The Stress Test results were out. It portrayed a hunky dory picture for the US banks. Obama is doing well to play up the sentiment. The banks need help but not too much. We are on our way to recovery. Throwing money at Banks has helped. There is always a free lunch out there. We just have to print US dollars and the only cost to pay is the cost of printing those notes. That's Obama's message for the world.

The Stress Test results will buy time till the next wave of failures. I don't see that happening very soon. The Banks managed to show good results by accounting jugglery. Wells Fargo for instance, saw NPAs jump by 40 pc but Reserves to accommodate the same were increased only by 5 pc. This especially at a time when the NPAs are increasing.
If the value of the banks debt decreased from 100 cents to 60 cents and banks took a gain of 40 cents on their books.

The Investors are not really bothered by all this. It time to herald a new dawn and keep buying the shares of banks. The only fly in the ointment is that banks make money from their customers. The Customers are the US citizens who have lost their jobs. GM just made a loss of 6 billion dollars last quarter. Even Toyota made an annual loss. These jobs are going to disappear and they are not going to come back. Who will pay the loans of these people. Who will hold the bucket for these losses which will come later on. Remember the US unemployment is now 8.9 pc highest in 25 years. Bankruptcy now looks inevitable for GM. You cannot keep losing billions of dollars every quarter.

The 1 part of the problem of credit availability has been solved but the second part of demand creation remains. Till jobs are created there will be no demand creation.

For now, it is time to party. Recession is ending and get in before the Dow moves to 10000 seems to be the feeling.

The real problems will start a few months down the line. The next results in July and August September onwards. Things can get nasty if institutions start failing. The whole so called solution till now is print more dollars. This will work only till the dollar remains attractive. The 10 year T bill is already upto 3 pc which is bad news as everything from Mortgages to credit card debt is linked to the T-Bill rates.

As and when Inflation rears its head, the central banks will have to start raising interest rates. The main problem the US faces is the lack of jobs for its citizens. That has to be fixed. Obama's tax plans to curb of shoring will back fire in a big way. If the companies dont move jobs to low cost areas they become unviable and leading to more bankruptcies.

Obama is like a typical idealist. he positions himself like a Robinhood, the defender of the common man. All that has come about now is lofty promises.

In India, the elections hold the key. Looks like UPA + Left support and a Pranab Mukherjee or Shiela Dikshit as a probable PM. I would buy on dips if the market dips post results while a government is being formed.

Last time all Opinion polls were wrong and who knows this time. NDA might just squeak in. Prakash Karat has now started talking of supporting Congress led government.

I would buy because the global problems have taken a pause for now, monsoons look to be on time.

Its a traders market not an investors market. Till we get clarity on the long term, buy low and sell high.


Saturday, May 2, 2009

U, V, W or L


Its time to take a break from stocks and re-learn the alphabets.

Have you guessed it?

We are looking at the types of recovery possible for the US economy and the World Economy.

1. V Shaped Recovery
In this type of recovery, there is a rapid deterioration in the economy and before you know it there is a sharp recovery as well. V-Shaped recoveries are less painful and are are the mild recessions last for about 1 year. We are way past this stage to say that there would be a V-Shaped Recovery this time.

2. U Shaped Recovery
In this type, things go downhill then flatten for a bit. For maybe 6 months or so there is no further deterioration in the fundamentals of the economy and then a recovery starts taking place. This type of recovery includes a dull phase of maybe 5-6 months where nothing much happens in the economy, but we do start recovering. We may be in a U shaped Recovery mode. The next 3-4 months may make it clear.

3. L shaped Recovery
This type of Recovery is a variation of the U-Shaped recovery, only that things get prolonged. Thing stop deteriorating but do not get better either for a long time to come. This may take up to a year when things are pretty dull. I would say we have more chance of a L shaped recovery.

4. W shaped Recovery
This is the most dreaded form of recovery. As the letter suggests, there is a sharp fall, then a recovery which flatters to deceive. Things fall down again and then we are again on the upward part. This is basically 2 recessions almost back. The second recession may or may not be as bad as the first one but it devastates sentiment.
People lose hope in this type of recession. The second recession may be smaller in magnitude but leaves everyone shattered. (George Bush's middle name is also W, which should give you an idea of the havoc it can wreck ;-) )

So, U, L or W, take your pick. Next 3-4 months will make things clear. I would say 25% changes of U shaped, 35% chances of L-shaped and 40% chances of W shaped recovery.

The implications for the world equity markets:

1. U shaped - the worst is over. We have hit whatever lows we had to hit. (Dow should be at 10000 by Jan 2010)
2.L shaped - the worst is nearly over. Slow consolidation for the next year or so. (Dow should be at 8000 by Jan 2010)
3. W shaped - You aint seen nothing. This was just a trailer. Picture abhi Baki hain. (Dow should be at 5000-6000 by Jan 2010)

The toxic assets are coming out slowly. In the US, 32 banks have failed so far. That's more than what failed in entire 2008.

Chrysler has filed for bankruptcy, GM is next in the queue. Obama has made it clear. GM is almost sure to file in for bankruptcy.

The US economy is showing some signs of stabilizing. The rate of deterioration is not as bad as it was earlier. Next 3-4 months will give us clear indications whether Spring is here or the onset of Autumn for the markets has come.

In the immediate future, the results are out of the way in the US. The next key thing is the Stress Test results. I think they should not be too bad.

The Dow looks to be stabilizing for the months of May and June. The Quarterly results in July will set the tone.

For Global markets, next 2 months should be serene.

Above. I have tried to outline the probable scenarios which could play out and the implications for the global markets.