Saturday, October 30, 2010

Diwali Fireworks: Explosive Week Ahead

Its Diwali Time and it is going to be a explosive week ahead, most probably the most explosive week of the year. There are several reasons and I am going to list them one by one. This definitely merits both a fundamental and technical analysis. The Technical Analysis will follow in a day or two.

1. RBI Meet on rate hikes on Tuesday, November 2. The Bank is expected to hike rates by 25 basis points. Liquidity is presently tight because of Coal India IPO, but that situation will ease by Monday when the allotment occurs.

2. The Fed Meet on Nov 2-3. The timing is a joke played on all of us. US goes to polls on November 2nd and the Fed will meet after the result is out. The US has a Senate and a House of Representatives. Currently, the Democrats control both and the Presidency. It is expected that the Republicans will wrest control of both. What does this imply? A gridlock ahead. The 2 houses can veto anything which the President suggests in policy terms and the President can veto the House policies.
The Quantitative easing which the market is expected to be at least in a range of 1000 billion dollars. If it is below market expectations, expect big time tanking.

3. For India, it implies that if dollars are pumped in, markets rise as liquidity gushes. Gold will climb and we will have a big rally taking the indices to new life-time rallies. If no easing, then gold will fall 4-5 %, the markets will tank. Lower circuit is not ruled out. Such events need to be handled carefully.

4. Coal India lists on Thursday, 4th November. FIIs have pumped in huge amounts of money. This is first big ticket IPO where the FIIs had to put in 100 pc money. Earlier was 10 pc of bid amount. Much of the money is from new FIIs which will find itself into index stocks, if the Fed policy comes in favor. So, the money is there.

5. Obama is visiting India and expect a positive buzz of sentiments. There would be a slew of feel good announcements and could lead to euphoria.

2 Scenarios: Positive Fed policy, plus cash from coal India IPO plus big ticket announcements = Upper circuit or a very big rally on the Indices could be 600-700 nifty or 2000 sensex points in a blink.

Negative Fed policy, flight of capital leads to big fall.

Applying human psychology, Fed will take easier stand, delay the problem. Give liquidity boost, let dollar be a toilet paper after 2-3 years, and let next Fed Chief and US President handle the bigger mess. This may be the last chance for US to rein in printing of dollars else its doomed to failure in the long run. This is the Consumer age, we live for the present, in the long run we all are dead. That is the motto. This makes Gold particularly attractive after a dip last week.

One simple logic as Frank Templeton, bull markets die in euphoria, that final kick is missing yet. Where everything is out of control. Maybe this is the week.

The Technical Viewpoint will follow.

ps: Many blogs are giving out Trojan signals when you run your anti-virus. Does anyone have a solution for this?

Sunday, October 24, 2010

TCS Results Rock

Very rarely do quarterly results of companies get me excited. I consider them as mere milestones on a journey. Milestones to which undue importance need not be attached. Poor or great results over a quarter or two are not earth shattering news except for the pink papers and news channels. TCS results are one which made me sit up and take notice. Why?
Here is why? They added almost 20000 employees in 1 quarter. They had double digit growth in all Verticals. Their profit margins were almost 30 pc and gap between Infosys and TCS is just 2.2 pc in terms of EBITDA margins. They became the first Indian IT company to login a turnover of 2 billion dollars in a quarter. They added 19 new large clients in first half of the year as compared to Infosys 9 clients.
The elephant has woken and begun to run. Infosys earlier had a large premium in valuations compared to TCS no more now. The Market cap of TCS has already overtaken Infosys. In P/E terms also the gap is narrowing.
When we compare Infosys, TCS and Wipro, Wipro seems to have lost its way, Infosys the management seems to be in consolidation mode.
I happened to see the management of TCS on CNBC and their body language impressed me. They indicated they are willing to do whatever it takes to grow. A calm, composed, confident management team. The transition has been smooth from Ramadorai to the next generation.
TCS expected EPS is 45 bucks for FY11, at around 25 times P/E not exactly cheap.But this is now a SIP stock. Buy 5 shares every month say for next 5 years.
In the long run, only the big IT companies will survive, the smaller ones will get merged and eaten up by the larger ones.

Sunday, October 17, 2010

Happy Dussehra

Wish all of you Happy Dussehra.

Here are some of the legends behind Dussehra.

In the months of Ashwin and kartik, Hindus observe a 10 day ceremony of fast, rituals, celebrations, fiests to honor the mother Goddess and triumph of Lord Rama over Demon Ravana. Dussehra also symbolizes the triumph of warrior Goddess Durga over the buffalo demon, Mahishasura. Thus, it is a celebration of victory of good over evil.

This celebration starts from Navratri and ends with the tenth day festival of “Dussehra”. Navratri and Dussehra is celebrated throughout the country at the same time, with varying rituals, but with great enthusiasm and energy as it marks the end of scorching summer and the start of winter season.

The tenth day after Navratri is called Dussehra, on which number of fairs are organized throughout the northern India, burning effigies of Ravana.It is also called “Vijayadashmi” as this day marks the victory of Lord Rama over Ravana. VijayaDashami is considered to be an auspicious day for the Indian householder, on which he worships, protects and preserves 'Shakti' (power). According to Scriptures, by worshipping the 'Shakti' on these nine-days the householders attain the threefold power i.e. physical, mental and spiritual, which helps him to progress in life without any difficulty.

The 'Ramlila' - an enactment of the life of Lord Rama, is held during the nine days preceding Dussehra. On the tenth day (Dussehra or Vijay Dasami), larger than life effigies of Ravana, his son and brother - Meghnadh and Kumbhakarna are set to fire.

The theatrical enactment of this dramatic encounter is held throughout the country in which every section of people participates enthusiastically.

In burning the effigies the people are asked to burn the evil within them, and thus follow the path of truth and goodness, bearing in mind the instance of Ravana, who despite all his might and majesty was destroyed for his evil ways.


Dussehra is also known as Vijaya Dasami, because of the victory of Ram over Ravana. On this day in Satya Yug, Ram (the eighth incarnation of Lord Vishnu), killed the great demon and king of Lanka, Ravana.

Puranas also opined that in this day warrior Goddess Durga defeated and killed the buffalo demon Mahishasura.

* Victory of Rama over Ravana:

Rama was the eldest son of King Dasarath who was the ruler of Ayodhya. When Lord Rama was going to be crowned as the next King, Queen Kaikayee persuaded the king to crown Bharat as the next king and to send Rama on an exile for 14 years. On his exile Rama was accompanied by his brother Lakshman and wife Sita.

A demoness Soorpanakha got fascinated with the charm of Lord Rama and wanted to marry him, for which she threatened to kill Sita. Agitated with this, Lakshman cut her nose. Knowing about what happened to his sister; Demon Ravana wanted to take revenge and in turn abducted Sita. Lord Rama, along with Lakshman and Hanuman, fought a battle against Ravana and emerged victorious in rescuing his wife Sita.

* Victory of Durga over Mahishasur:

The demon Mahishasur, was given a boon by the fir God (Agni), according to which, any weapon that had a masculine name couldn’t do anything to harm him. Taking the advantage of this boon, he caused immense destruction and hatred. The gods were very tensed and worried about this fact; they consulted Lord Vishnu over it, who advised them to invoke Goddess Shakti. With God’s prayers, a divine luster sprang from the heart of Lord Shiva and bodies of all gods forming the Adhya Shakti. The gods then gave her ornaments, and a lion as a vehicle. She was supposed to fight Mahishasur, the demon. For nine continuous days and nights, Goddess Adhya Shakti-Durga fought the demon-Mahishasur, and finally emerged victorious at the end.

Saturday, October 16, 2010

Gold Rush

Gold has suddenly become a hot investment option. I have always felt one must have exposure to Gold in our portfolio and here are some of the reasons why I feel so.

Saturday, October 9, 2010

Financial Goals and Asset Allocation

This week, lets step aside and take a look at the purpose of investments and financial planning. I always like to say we work for our money but does the money work for us?
People get up every morning, go to work and come back in the evening. Now, what is the purpose of doing this day in and day out? It could be job satisfaction, work as a hobby but the primary purpose of going to work is to earn money.
The idea of setting financial goals is like setting milestones to take us through the journey called life. People work so that they can have a comfortable retirement. ow, what is the definition of a comfortable retirement? It means doing what we want without having to think about where the money will come from.
The only way of doing this is by starting to save from day 1 when you start working and letting the magic of compounding to do its bit. For example Rs 1 lakh saved after 30 years at a rate of 8 pc becomes about 10 lakhs. Now, for 5 lakhs to become 10 lakhs at the same rate of interest of 8 pc would take 10 years. Starting to save early, is just the first part of journey towards financial independence.
Next is to set goals. Goals as in by the age of x I would like to have saved y amount of money. Only, when we have goals i front of us can we save money towards. Now, buying a car, going on a vacation are not financial goals. These goals are minor goals which we need to have to live life towards the fullest but not the primary goals.
Once we have decided how much amount we want to have saved by x age is to go about achieving it. This could be achieved through a mix of real estate, gold, equity and debt instruments. The thumb rule for this is 100 - your age = investments in risky asset classes like equity. For example, a person who is 35 years old can have up to 65 pc of his investments in equity.
A safe mix is usually having Debt instruments of about 50 pc ad rest in equity, gold and real estate asset classes.
Now, a person has started investing early, has his goals in place, the next step is to keep monitoring them. This could be at pre-defined intervals of say 3 months and bring in course corrections as and when required.
Next time, we could look at proper asset allocation. The pros and cons of each asset in asset allocation.
To sum up,
1. Start investing early and let compounding do its tricks
2. Set goals in life, by which age you want to save up how much
3. Do proper asset allocation
4. Keep monitoring regularly.

By following this simple 4 point program, you are on your way towards financial independence.

Sunday, October 3, 2010

Why FIIs invest in India

Here I am taking an illustration given by my friend Aarti. The FIIs stand to gain much more than us Indians. Here is why?
The rupee rate is 48 rupees to 1 USD. Assume, we buy Nifty BEES (Benchmark ETF) at 480. This means Nifty is at 4800. We get to buy 100 units of Nifty ETF with 1000 dollars.
ow a couple of months have passed by and Nifty reached 5350. Our ETF rate has gone to 530. The Indians earn 10.41 pc rate of return. Now our friend Mr Bernanke continues with his low interest rate regime, interest rate of almost 0 pc, he prints some more dollars, gold rallies and USD weakens. Now 1 USD gives us 44 rupees. We decide to encash our Nifty BEEs 100 units. We get back Rs 53000 = 53500/44 = 1215 dollars. A return of almost 21.5 % and the game goes on.
If the rupee strengthens to 42, we make even more returns. Now, FIIs are always leveraged that is they for every 100 dollars they invest, they can buy up to 300 dollars worth of stocks. They can make triple the profit. At the opportune time, they sneak away and the game begins in some other emerging market.
This is the secret of the so called FII flows.Of course, one can go with the trend and aim to move away before the music stops playing.

IDFC Infrastructure Bond Issue

Every week, we look at equity related offerings. This week, lets step aside and look at some debt offering. IDFC is coming with an Infrastructure Bond issue which closes on October 18th 2010.
The government has issued a notification that an additional amount of Rs 20000 can be invested in, other than your limit of 1 lakh rupees under section 80. This means this Rs 20000 will be exempt from your taxable income this year. Depending on which tax slab you fall under, 10 %, 20% or 30 %, you will save additional income tax of Rs 2000, Rs 4000 or Rs 6000 respectively. (I am not computing the surcharge amount- the real rate of taxation can be 10.3%, 20.6% or 30.9%)
In addition to this, you get 4 different options of investment as below. The bonds have a lock-in period of 5 years and have a maturity period of 10 years. 2 options are cumulative ones and 2 are annual interest options. For the bods yielding 7.5%, after 5 years the company will give a buyback option and for those yielding 8 pc no buyback option.

I would invest in the 8 pc option bonds as even if there is no buyback option, the bonds are listed on the NSE and can be traded after the lock-in of 5 years.
IDFC is a triple A rated paper, interest rate of 8 pc, along with the tax benefit makes these bonds one of the best investment options going around.
Please note the interest is taxable and will attract the normal rate of taxation. With the tax break the real return actually works out to as high as 12-14 pc pre-tax.
Also, even though the benefit of tax breaks is only 20000 rupees, one can invest higher amounts. The 10 year bond yield is around 8 pc.
At current market valuations, debt is another option one must look at as interest rates may peak after maybe another 100 basis points hike. Bond yields and bond prices are inversely proportional. When rate cuts come in, bond prices rise and the returns in those years can be as high as 20 pc.
L&T NCDs are listed on the NSE and those are another good option for those looking at good quality paper, liquidity and decent returns.
Our asset allocation should not only be equities, but also gold, debt and other asset classes. I am not a big fan of real estate investment other than place where I live simply for the myriad red tapism, difficulty in disposing and the procedural hassles. I prefer assets where I can liquidate and get cash in max 3 days.