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.

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.

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.

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?

Fundamentals:
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.

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.
http://www.bseindia.com/mktlive/market_summ/categorywise_turnover.asp 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.

Critical Week Ahead

The markets hit a high of 5182 on the nifty before closing the week at 4997. This was a very interesting week, and the week that follows will tell us whether the entire rally which started from March is over or just a small dip. There were several differences this week over the previous 7 months.

First, the FIIs were huge sellers on last 3 days. They pulled out almost 1500 crores whereas DIIs pulled out 80 crores. I went back and checked. The DIIs have bee net sellers over August, Sept and Oct. In July they were marginal buyers.
This means the entire rally from July, post budget has been on FII flows. This week FII liquidation could be because of Galleon and Lehman forced liquidation or something else. If it was only a forced liquidation, then we should be ok.

Second, Nifty closed at 4997. The 5 week EMA was at 5000, and it has closed below it. This is only the second time in 7 months it has done so.Hence, for the bull run to continue we should close above 5000 next week. All the max open interest is at 5000 strike price for Oct expiry. So we should be somewhere around this by Thursday with a negative bias as there are more calls than puts written at 5000.

Thirdly, we have closed below 20 EMA from which we have taken support many times. 50 EMA comes at 4853 which becomes a key level to watch. Closing below this level for 3-4 sessions, then all bets are off.

UK recession continues. Longest recession since they started keeping records. In US, the corporate results were better than expected. The main thing is profits have increased but not the sales to the same extent. The increased profits come on the back of cost cutting measures. But you can cut costs only to an extent.

Lets see if the entire upmove from March is over and we begin the next leg of downmove or the uptrend is intact.

Over the longer term, I am bullish on sugar, gold and Telecom (Bharti).

Diwali Picks

It is Mahurat trading time. We have picked up certain stocks which we feel will do if the markets do well.
Also, it is a time of caution, as P/E of nifty is around 23. A staggered buying approach would be good.
I would also like to thank Lakshmi Ramchandran for all the efforts and encouragement put in to make this presentation a reality.

Please check out the presentation here:
http://groups.google.co.in/group/nav-files/web/Diwali%20Picks2009v1.0.pdf

Markets: Amber signs flashing, but not Red Yet

It was a day trader's paradise this week at the bourses as the markets oscillated.

Key events were the dumping of Telecom Stocks, Infy results and Reliance bonus announcement of 1:1. Reliance came out with a bonus issue which surprised the markets but there was no reaction from the markets. An intra- day spike of 6 pc and thats it.

The markets typically hail a bonus issue which is nothing but a sentiment booster for the Retail. Eventually after a month or so after the bonus announcement you get the stock cheaper. An example of this was the Siemens stock last year.

Infosys as usual delivered a good set of number. Their Eps of Rs 100 for this year puts it at a P/E of 22. Not cheap for a stock where there is no growth year on year. The P/E to growth ratio the thumb rule is that it should 1.

Fair P/E for Infy I would put it in the range of 15-17 giving it a valuation of 1500 to 1700.

The most shocking was the dumping of the Telecom sector stocks following a price war announced by Reliance and TRAI declaring a discussion per second billing. Bharti lost almost 25 pc to end around Rs 343. The institutions follow a herd mentality in dumping stocks. I would accumulate Bharti for the simple reason it has 110 million subscribers out of 443 million in India. It has submarine cables and landing stations i key cities.
Bharti is an integrated telecom player and with 3 G, data communications would be another major play. Voice would be just 1 plain vanilla low end offering to entice the customer. The idea is to lock in a subscriber and use his mobile to be his gateway for payments, accessing the net and even his supermarket.
I would not be surprised if free voice calls upto a limit are offered if an user goes in for data solutions from a vendor.

The FII flows seem to be pausing, with the dollar weakening. A weak dollar means for fresh inflows, 1 dollar can buy less amount of stocks. Good news for existing investors as they can exit the Indian stocks with more dollars.

Nifty ended at 4945. It has a cluster of supports. It is at the trend-line joining lows since March 2009. 20 EMA is at 4935. If it breaks this next support comes around 4750.

Nothing is impossible but next week it seems it would be tough to touch 4750. My reasoning is simple. A truncated week with a holiday on Tuesday. Indiabulls Power IPO closing on Thursday means the market will remain shored up at least till Wednesday afternoon or even Thursday.
Look at the put-call spreads, 5000 is a key pivot. Almost same number of puts and calls have been written around this mark. So, its in the interest of the option writers that the markets revolves around 5000. Thats what has been happening last week, and option writers have been eating the premiums.
4800 and 4900 have huge OI in Puts ad would act as strong supports. They will not break easily. 5100 and 5200 calls have good OI build which would be resistance points.
Looks to be a range bound week.

Sporting excellence a sign of an emerging superpower

The Olympics for 2016 have been allotted to Brazil. Brazil has edged out established cities like Tokyo, Chicago ad Madrid.

Often, when a country is on its way to becoming a economic superpower, it is reflected in the Sports Arena. By this, I mean consistent performances, not a few flashes in the pan, moments of individual brilliance.

Lets take the 1992 Barcelona Olympics. During those games, Soviet Union was at the top with 45 golds followed by USA and Germany. China was just making a small splash in the pool with about 16 golds.

In the 2000 Games, USA had 36 golds, followed by Russia with 32 and China 28 golds. The gap between China and the the top powers was coming down.

Cut forward to the 2008 Games and the performance reflects the new order in the world. China has got 51 gold, USA 36 golds followed by Russia.

There are several reasons for sports mirroring the economic strength of a country. As a country grows prosperous, the surplus funds grow and its citizens get better facilities. Athletes and other sportsmen get world class facilities to practice and are taken care of by the corporates.

China hosted the 2008 Olympics and it was making a statement to the world. We have arrived. We have the best facilities in the world. Our Sportsmen are the best in the world.

As the economic clout of a country grows so do its allies. Brazil was able to edge out even the mighty Obama backed Chicago. Speaks a lot about where USA is heading.

We have the 2010 Commonwealth Games. Lets see what message we send out to the world.

ps: Sometimes, its fun to ignore the markets and look at other angles associated with economics.

P/E:An update

The Nifty P/E is at 22.89 as of 01st October.

It has exceeded these levels only during the bubble crashes of 2000 and 2008. In 2004, it briefly flirted above this level before falling.

We have 2 scenarios now:
1. It keeps rising to about 28 creating a bubble like scenario. It would break the previous high or thereabouts and the a mega fall.

2. Correct from anywhere here to 5200 zone. Every time it corrects, it comes down to a P/E of 14-16 which would be equivalent to 3200-3600 range.

Right now, the liquidity is gushing with FIIs pumping in 1000 crores daily. I have not seen even in the earlier bull run.

We have the dollar carry trade like the yen carry trade with hedge funds borrowing at low interest rates in the US and leveraging these dollars in India.

These positions will be unwound when the dollar strengthens, (it would take more rupees to buy the same dollars invested) or interest rates rise in the US.

The dollex is showing some signs of rebound on Bernanke comments. Interest rates rising in US will take some more time.

Troubles in China or at home in US could reverse the flows.

Time not to invest aggressively and keep taking profits with trailing stop losses. I would keep a stop loss of 4900 for my investments.