Sunday, September 25, 2011

Inflation v/s Growth

There is a national debate going on over the rising Interest rates and the rate hikes by the RBI. Should growth be sacrificed at the altar of curbing inflation. It is a interesting debate and merits a deeper look into it.

The RBI has deviated from the global central banks by raising Interest rates and we now have the Repo rate at 8.25 %. This is the rate at which the RBI lends to the banks. A higher Repo Rate means Interest Rates rise and it becomes difficult for businesses to borrow money and invest in expanding their businesses.
Global, the interest rates are pegged near zero the US Fed and the European central Bank.
What are the advantages of low interest rates?
This means businesses can borrow cheaply, spend on expansion, use that money to buy commodities, speculation, pump up the markets and in general have a good time.
Now if it was so good to have low Interest Rates then why is the RBI increasing rates and spoiling the party?
Unfortunately growth always comes at a price. When we have money chasing too few things and money is available freely, the resources become more expensive.
Inflation drives up the prices and if the wages do not keep pace the life of common man becomes difficult.
Cheaper money also means the value of money goes down. 100 rupees could buy many more things in the 1990s. It could buy 5 litres of petrol, now only about 1.5 litres of petrol for the same price.
Inflation happens because of 2 things. Inflation is a by product of supply demand. Whenever there is a mis-match that when demand exceeds supply, then prices go up.If demand is more, it can be reduced by raising the cost of money. If there are supply side constraints, then production has to be increased.
Unfortunately, the RBI can only look at demand management.India's economy is growing at 7.7 pc which is much more than the world economy growth rate of 3.1 pc and developed economies growing at almost 1-2 pc. The RBI can afford to raise Interest Rates by sacrificing some more growth.
The life of the common man is made tough by inflation. This leads to labor unrest and in general strife. The price of many of the daily essentials going out of reach of the common man
The RBI is criticized by the financial commentators because they have a vested interest in having low interest rates. They can sell more things, can speculate more.
In 2008, Governor Reddy was criticized for raising rates too early but in hindsight, India suffered only a slowdown not a recession. Many did not even feel we were in a slowdown as the job cuts were relatively less.
We are on the cusp or rather already in part 2 of the recession. The next 1 year is going to be bad very bad. Its time to preserve capital and build for a better future in the growth that follows.
Governor Subbarao for all the criticism he is facing now may well turn out to be a visionary. His steps over the last few months have been bold and much needed.
The Recession never ended. It was only a pause due to artificial pumping up of the economy in the US. The second part is still pending and almost here. Last time it was Financial Institutions going down, this time it will the sovereign defaults.

For those interested in stock picking in the downturn, I am enclosing the link of Lakshmi,

I am enclosing the link of Lakshmi for those who are interested in bottom fishing of stocks.

Editor's Note: Aarti's comments say everything.Thanks Aarti.
Questions to be asked are::::

1. Is liqidity in system drained out to such extent thta banks not able to fulfill needs of corporate credit? Answer is No.

2. Is money growth in system curtailed? Answer is No.

3. Are govrnment 364 day T Bill yields crossing even 8.5% even when repo rate is raised to 8.25%? Answer is No. This is more than enough indiccator of abundance of liqidity in system.

4. What is interest cost of corpratesout of their EBIDTA revenue & how much thta is incrementally increasing with each 1% rise in repo rate? A few basis point if not more. Plz dunt tell coporates are so poor not able to absorb those few basis point rise in costs. That too atfer they are increasing product price beyond 9% YoY (this is nothing but WPI growth aka inflation).

5. What is that social commitment coporates are showing to give back to poor, reducing their product prices voluntarily or to improve literacy levels or to improve civic amenities? Absolute nothing.

Coporate world is running after free money & speculate & mindlessly expand & live beyond it means & show excess in balance sheet as their hard earned profit.

That runaway balance sheet growth on free money is being dubbed as GROWTH on retail investors. Retail investors are being taken for granted, they are getting commanded by industry shenanigans to believe all cock-bull stories only because big shots are telling it on TV.

This is getting as hilarious as it can get. All of us can get it using a bit of some brain, not by singing a chorus for white collar thieves' song.

This nonsense of crying over 0.25% intrest rate increase hurting growth must be stopped.

Saturday, September 17, 2011

At crossroads: Tricky Juncture

It was a week where market threatened to tank and then showed signs of breaking out but ended up with 0.5 pc gain. Markets are at cross roads with endless possibilities before breaking down.

1. As per Elliot, this could be sub-wave 3 of C starting from 5741 and we are in the last leg of upmove of sub waved 4.
Sub waves of 3 as below:
1. 5744 - 5497
2. 5497 - 5702
3. 5702 - 4720
4. 4720 - ongoing
4 A till 5169, B till 4911 and C ongoing. If this is 4th wave of 3rd then should not go beyond 5200.

It could also be Wave 3 ended at 4720 and this is C-4 which can go on till 5360.
In any case, the upmove should end this week.
Wave 1 5944 - 5196
wave 2 5196 - 5741
wave 3 5741 - 4720
wave 4 4720 and ongoing

(This is preferred view)

To summarize, if C-3-4, upmove should end soon. If C-4, then the market can go up to 5300-5400.

3. The RBI has hiked interest rates 25 basis points. This will leave less cash in hands of people as also kill demand. Inflation is also raging. The Petrol price hike of 3 bucks adds to the misery. Growth is slowing down. Stock Markets moving up looks to be difficult in all this.

4. Banks and autos will be the most affected along with real estate stocks. These sectors should be on the avoid list for the time being.

5. The problems of Europe are still not solved. All these are temporary fixes. Time is being bought.

6. Money should be locked in gilt funds. The NCDs have come and gone. Buying should be done around 4600-4800 band.

7. The rupee has depreciated to 48. After the rate hike, some pullback to 47.20 is seen. A weak rupee further diminishes the returns of FIIs.

To summarize, fresh downsides when 4900 breaks, 5020-5040 is another support area. On upside 5130 -5180-5200 are strong resistances beyond which comes 5350-5400.

For those interested in stock picking in the downturn, I am enclosing the link of Lakshmi,

I am enclosing the link of Lakshmi for those who are interested in bottom fishing of stocks.

Thursday, September 15, 2011

Beginner's guide to Investing in Stocks

This is a question I come across very often. I am new to the stocks markets how do I begin investing? I had done a guest post for Subhankar's blog.
The link is as below:

Sunday, September 11, 2011

Decisive Week Ahead

The Markets gave up almost all their gains on Friday and closed up only 0.4 pc for the week. The next week is crucial because the RBI policy is on Friday which will give further directions to the market.

1. If we take the rally from 4720 to 5169, retracement levels come to 4997. 4944 and 4891. Only a close below 4891 will indicate fresh new lows.

2. There could be 2 possibilities of this corrective up move. 1 is that the entire up move is done and we are on a fresh leg down. The other is A-B-C up move and only the A leg is done. B downwards till 4891 max and a final rally up to 5232 or 5350.

3. The rupee has weakened to 46.57 which is way above its high of 44. What this means is that the FIIs are losing money. To take out dollars, they have to convert rupees into dollars. They need to convert more rupees to get same amount of dollars they put in.

4. Crude Oil imports cost goes up and also price of Gold increases in INR terms.

5. The NCDs have mopped up almost a billion dollars of worth and there are no further prospectus lined up. Later during the year, we have NTPC ad NHPC coming up with NCDs with 10 year maturity.

6. Gold has held up very well. It has bounced up after every fall. In rupee terms we are almost trading at all time highs. Gold continues to be buy on dips.

7. The Obama Job plan has nothing concrete in it. In US, thanks partly due to technology jobs continue to be lost and they are not going to come back. For the Eurozone worries also, nothing concrete is in place and that is why the markets keep falling after bounces.

8. Elliot gives 2 possibilities. Of C wave down from 5944, the current rally is the 4th wave of the 3rd down. This means after a fall to 4500-4700 we have a rally till 5300-5400 and then a final fall to maybe 4000 on the Nifty.
It could also be that the current up move is the 4th wave of C and then we shall have 5th wave till about 4300 - 4500.

Whatever the possibilities, upside seems limited and downsides still appear to be about 20-30 pc.

9. The Earnings of the Nifty have gone up by 31 pc in the 3 years since we hit the bottom in 2008. Equivalent bottom of 2008 comes to 2952 on the Nifty or 9832 on the Sensex. If we consider the closing low, it comes to 3276 on the Nifty.
Hence 3300 to about 30 pc above 4300 represents a buying band.
The range between 3300-4300 on the Nifty represents absolute value. In P/E terms this comes 12-15.5.
Strategy could be deploy 20 pc funds at 4300 and 20 pc at every 200 points below it. Which means 4100, 3900, 3700 and 3500. This is just a rough guideline. If the markets rebound, then one could also buy a bit higher.

For those interested in stock picking in the downturn, I am enclosing the link of Lakshmi,

I am enclosing the link of Lakshmi for those who are interested in bottom fishing of stocks.

Sunday, September 4, 2011

Technicals for the Week

The markets closed up 6.2 pc for the week to end at 5040. Let us look at what is in store for the coming week.

1. We have a short term low in place as the market cleared the previous high of 4965 quite comfortably and closed above it for the past 2 days.

2. This means the down move from 5944 is in its 4th wave up. Retracement targets could be 5110 (already done), 5230 and 5350.

3. 4th Wave is in three legs A-B-C. A may be done at 5114. B could end at 4964, 4917 or 4870. Only a close below 4870 indicates weakness.

4. Gold continues to rise and we should see a rise till about 2200-2400 USD. Gold is buy on dips till it hits the targets

5. The Gilt funds have started giving a monthly return of about 1 pc for the past 2 months. Time to add more funds in the Gilt funds after the RBI Meet on September 16th. Hike of 25 basis points is factored in, but I would ot be surprised to see a 50 basis points hike looking at inflation and the GDP numbers.

6. Trend line support comes at 4955-4965 again underlining the significance of this level.

7. On the upside we run into resistances in 5180 - 5200 band. Immediate resistances come in at 5100-5120.

8. The Bollinger Bands give resistances at 5195 and 5350.

To sum it up, watch out for supports at 4965, 4920 and 4870 and resistances above 5100.

I am enclosing the link of Lakshmi for those who are interested in bottom fishing of stocks.

Thursday, September 1, 2011

Stock Picking in the Downturn

I keep getting queries which are the stocks to buy in this season of downturn. My friend Lakshmi whose Technical Analysis I love has come up with a shopping list. Have a look at her blog at below link: