Saturday, November 28, 2009

Dubai Crisis: What it means for India?

The markets tanked on Thursday and Friday. The markets lost about 6.46% to hit a low of 4806 before recovering to close at 4942. The Dubai World inability to pay the loan raising the possibility of sovereign default.

Dubai World is a wholly owned subsidiary which has interests in businesses across the world. It has a stake in Dubai Ports. Its real estate arm is called Nakheel which is developing Dubai.
Contrary to public perception, only 6% of Dubai's revenue comes from oil and natural gas. Most comes from Trade (16%) and real Estate (22%). The Dubai World is asking for interest holiday on their loans. The loans total to almost 64 billion dollars.
Dubai was being developed on the US model of taking huge debt and developing another Las Vegas.
So what does this present crisis imply?
First of all, the speed with which it is resolved will decide the course of the global markets. Most likely the cash rich Abu Dabhi Emirate may step in. A lot of UK Banks have exposure to this debt. This crisis will send alarm bell rings across the globe. A flight to safety and risk aversion may mean the dollar index strengthening.
In March 09, the dollar index hit a high of 89 when the emerging markets hit a bottom.A 17 % dip in dollar index has led to emerging markets doubling.
The FIIs sold 1050 crores on Friday and they have been selling the whole week.
If there is a flight to safety, the dollar index will strengthen and the dollar carry trade will unwind.
The dollar strengthening means commodities becoming cheaper. Gold prices eased on Friday hitting 1155$ dollar to a ounce at one point of time.
This could be a good point to add gold at lower rates. The Dubai crisis how it pans out will decide the future course of the markets.
Also, the India diaspora working in the Middle east will be hit if employment opportunities go down. A large Forex boost for India is the inward remittances from Indians employed there.
The government has a lot to think about.

Saturday, November 21, 2009

How to play the upmove

It was a Friday second half rally which took everyone by surprise. It looks like the previous high of 5182 for this calendar year could be taken out. So how do we play this upmove?

First there are several confirmations we need to wait for:

1. The fall from 5182 to 4539 was retraced in slower time than the fall. Retracement in slower time could mean that the rise was just a retracement to the fall. The pullback could be 80% of the fall in extreme cases, which in this case would be 5054 +- 30 points for whipsaws. We have already seen a high of 5079. The market corrected to 4933 (a weekly pivot). This fall was 27 pc of the up move from 4539.

2. The trend line joining the lows from 4539 comes to 5083 approx. The index needs to close above this for the uptrend to sustain. Weekly supports come around 5016-5022.

3. The 89% retracement comes to 5111. Beyond this level it is clear that this up move is more than just a retracement.

4. Reliance is 1 stock which has a record date of 1:1 bonus on 27th November. Typically stocks tend to move up after the ex-bonus date. This is also especially because of the perception in people's mind that the stock has become cheap. Reliance is currently trading at Rs 2125. If we look at the charts, it has broken the trend line joining the lows from Oct (Nifty 4539). If it moves up above 2150, it would also break the trend line joining the highs from October. Next would be a first target of Rs 2300.

5. Reliance formed a bullish engulfing pattern on the charts on Friday and also negating the highly bearish 3 black crow pattern.

4. Another advantage of playing Reliance is that if the market tanks, its a solid stock in one's portfolio.

5. The dollar index is strengthening. This could lead to FII unwinding. This needs to be watched. The next week is a shortened week in the US due to Thanksgiving. With our expiry on Thursday, the trend would be clear by Wednesday.

Happy Trading.

Saturday, November 14, 2009

Airport Developers: Niche Sector

All throughout history, those cities have flourished which serve as a gateway to countries. The era of colonization may be over but the adage still hold true. London,Paris and Mumbai are just few examples where cities which have ports nearby have flourished.
Airports are the new gateways to the world. Every big city in India has just 1 airport or maybe in future to have 2 airports. Airports require lots of land and its a monopoly business.
I took a look at the major airports in India. GMR Infra has Delhi and Hyderabad airports under its belt. GVK Power had Mumbai and now a 12 pc stake in Bangalore airport.
The benefit of these 4 airports is that more than half of the nation's air traffic passes through these airports.
How do these folks make money?
1. Landing charges for aircraft, passenger fees which passengers pay when they take off from the airport.
2. Ground handling and baggage charges.
3.Non-Aero streams like rentals from shops, beverages, ATMs, car hire and airport amenities.
World wide about 70 pc revenues come from non - aero streams.

These operators have the airports on lease for about 50-60 years. I am particularly excited about Bangalore and Hyd airport because they are far away from the main city and the developers get huge parcels of land around the airport to develop for commercial use.

Remember 50 years back when current airports were built they too were on the outskirts of the city but now have become central airports.

Airports fall into the category of businesses which have high entry barriers. This is because no 2 airports can be built within a radius of 200 kms and current developer has first right of refusal.

The Noida airport has not taken off because of this same fact. The Navi Mumbai airport also will remain just on paper. This is because I have visited the site and seen for myself that lot of mangroves will get destroyed if they build the airport. This is precisely the reason it is stuck with the Environmental Ministry.
Even if the permission is given tomorrow, it will take at least 5 years for the airport to be operational.

Its difficult to find new investment ideas every day. This is 1 opportunity in front of us.

Next is valuations. That is as per individual appetite. These are real long term buys with great gestation periods. Both GMR and GVK are in power generation as well which would be hived off as separate companies.

Sunday, November 8, 2009

The Broad Picture: Are we onto new highs again?

The Key event for me in the past week was the RBI picking 200 tonnes of Gold. We have come a full circle since the time, the Indian Government pledged gold with the IMF in 1991.
Are we then on our way to new highs?

The Corporate Results, by and large have been good to excellent. The bottom lines of the companies have grown more than the top lines. This shows companies are cutting costs, getting rid of the excess flab accumulated during the good times.
Autos, IT companies have done exceedingly well. At the same time, dangers lurk around the corner.
The food inflation is almost 13 pc. The SLR has been hiked and CRR are a matter of time. The early signs of revival are there, but they need to be on a sustainable basis once the crutches of stimulus are removed.
The government has come out with a disinvestment list. This bodes well for the economy and the stock markets. Governments should be in the business of running the country not businesses. This would increase the depth of Indian Markets as well as bridge the fiscal deficit.
Domestically things look good.
The catch is in the global economy. The UK government has extended bail-outs to the UK Banks. The US interest rates are almost close to zero yet again.
US risks going into a long period of no growth like the Japanese did in the mid-90s. Also, the current liquidity is leading to the Dollar carry trade like Yen carry trade.
Once, the US dollar strengthens, that is when the US Interest Rates rise on the back of Inflation, the pack of cards will collapse.
The US is the world leader. Unless US consumes, the rest of the world will not have a big audience for their exports. For all the talk of de-coupling, the global markets are still integrated.
The rise of Gold prices to 1100 dollars is seen as a flight to safety. Throughout history, Gold is the only asset to have existed for thousands of years.
Gold was Rs 6500 in 2005 and now is Rs 16500.
My preferred picks on declines would be Sugar, IT companies, Autos and Gold.
I would err on the side of caution now and stay light.

Technically speaking, the 4800-4900 is littered with resistances. We have the 5 week ema at around 4867, then the 20 and the 50 day emas in the same band. Also, the retracements for the entire fall from 5182 to 4539 falls from 4860-4936.

I would go long only on a decisive close above 4900 or short below 4700. Till then watch.

Sunday, November 1, 2009

Is the upmove over?

It was an action packed F&O expiry and a one way journey down. There are several interesting observations to be made which may suggest the entire rally from March 09 bottoms may be over.

1. The trend line joining the lows from March is broken decisively on weekly and daily basis.

2. The FIIs and DIIs were net net on the sidelines for the month of October. Both were almost net zero in terms of money pumped. The BSE link from where I got the data.
This means that DII turned neutral to negative since August and now the FIIs have joined the same view. This makes November very critical.

3. Even though the market has corrected 7-8% from the tops, many stocks have lost much more, indicating a brutal market wide sell-off.

4. On the basis of 5 week Ema which comes to 4903, we have decisively broken it for the first time since March'09. This is the second weekly close below 5 week ema.

5. The 50 day ema was broken without much ado around 4850. The next support comes around 4600 odd levels.

6. The heartening thing to note was that both FII and DII were net buyers on Friday to the tune of 500 odd crores each. In spite of this the markets fell. Maybe a bear trap for shorters.

7. The Dow closed down 250 points on Monday nut it has also reached the oversold levels and a bounce is expected.

8. The RSI(14) is at 31. This is at lowest levels since March and in the oversold levels. A bounce ca be expected any month. Till 50 EMA is decisively taken out, I would use rallies to short.

9. The RBI credit policy with a hike of 100 basis points is a good step. RBI is ahead of the curve. Better pain now, that a bubble being created.

10. The US GDP growth of 3.5% is largely due to the cash for clunkers scheme and fiscal injections.

Conclusion: Those who have booked out, enjoy the fall and be ready to buy at lower levels. The rises can be used to get out. Those who have missed out the fall as a shorting opportunity, the first fall is always difficult to catch. I would wait for a confirmation of a second weekly close below 4900.