Wednesday, July 14, 2010

Sugar Dreams



Investment Strategy in the light of proposed decontrol of Sugar prices.

This moonsoon season has coincided with the deregulation season this time. Everything is getting decontrolled, next on line is sugar and it is again a major plus for sugar producers, efficient markets and better price discovery. Consumers will benefit in the long run with ‘efficient prices’.

If government estimates are to be believed, this year is going to be a surplus for sugarcane production and sugar supply will outsrip demand. No better time to decontrol, three months time frame is what they are looking at. If you are an investor, no better time to pick up a few lots of sugar company stocks. Balrampur Chini is the only stock I am following for this sector and it is trading at around 85-86 levels. I have a target of around 120-130 with a 4-6 months investment horizon. Keep a stop loss at around 75 and go long this stock. There is likely to be major upside with a few positives lined up for this sector. For commodity traders, go short sugar with 2 months expiry (though watch out for seasonal trends on increases in prices around the festive season).

No more ‘Chini Kum’, enjoy monsoon with lots of sugar (and some sugarry returns) up your sleeve.




Sunday, July 11, 2010

A tender apology to the people of Kashmir.



An apology to the people of Kashmir and the way forward for the Union of India.

We’ve been unfair to the people of Kashmir since independence. We owe an apology to them for what they have gone through all these years and for our inability to provide them the same level of economic, political, cultutal and social status that our democracy bestows on all citizens of this country. My tender apology to all the Kashmiris who have suffered in whichever way for all these years while the establishment and the people of rest of this country failed to hold their hand and form a common cause with their struggle and miseries.


A political dialogue is required for a permanent solution of the Kashmir problem and that is in the interest of all, including India and Pakistan and in particular the people of Kashmir, on both sides of the border. For the Union of India, it is time we make some amends in our approach and thinking towards Kashmir and provide it all the amenities and priveleges which other states of the Union are enjoying since independence.


The union should consider bringing the State of Jammu and Kashmir at par with other States of the Union both on economic and social infrastructure fronts. A major thrust on physical infrastructure including (but not limited to) building world class roads, bridges, canals and waterways, airports, schools, colleges and hospitals, recreiation facilities and providing essential services like electricity, water, sanitation and other pheripheral services. The intangibles in terms of restoration of civil and local bodies, local administration and social sector schemes delivery mechanisms needs to be spruced up.

The people fo Kashmir have suffered and a NREGA kind of scheme which promises them guaranteed employment commensurate with their skills needs to be introduced. Provide them safe houses, hassle free public transport, pensions for the elderly, free education for the children, self employement for the youth, world class medical care and welcome industry and businesses in the state. Focus should shift on uplifting the economic profile of the both the people and the state of Kashmir. Government should consider setting up a free trade zone and SEZs with special economic benefits in the state. All businesses which employs 50 of more Kashmiris should be provided a tax holiday and preferential treatement in terms of tax waivers and low cost financiang be provided to SMEs and Cottage Industry.



Empower the people of Kashmir economically and provide them an environment which gives them a sense of belongingness with the Union of India. The problem of Kashmir will precipetate in thin air if the Union is able to deliver half of what is said in a secure environment. People would not mind the use of excessive force if that ensures them economic empowerment and a better living standard in a safe and secure state. Do you think Kashmiris would want not to side with the Union of India, if they are economically and scoailly empowered to be first grade citizens of this country? All talk of autonomy (even in the partial sense) and the thought of even the minutest of roles for Pakistan in Kashmir will send shivers down the spine of the citizens of Kashmir. The only worry at that stage would be to maintain the status quo and ensure high growth and opportunities for Kashmiris in Kashmir. Welcome Kashmiris in the mainstream and embrace them with love, compassion, respect and equality. Kashmir shall never be the same again. Long liveKashmir, long live it’s brave citizens.

Saturday, July 10, 2010

Handling Internal Security Issues


Required - An Article 356 replica to strip states of Police function in the event of ineffective policing. 

The orders it seem are clear from the top; hit them and hit them hard. Centre’s strategy has started showing some headway in tackling the Maoist violence. A few top Maoist leaders were gunned down recently and we are increasingly hearing threats from Maoists of avenging their killings. The single minded approach of the centre and it’s pulling up the states over their inaction and lop sided approach has started paying some dividends; though the fight is now getting nastier. Maoists are fighting with gusto but their killing of common man highlights their traits of cowardice.



What is worry some is non alignment of the interests of centre and the state governments. Especially since the internal security is a state subject and centre is only providing inputs and support to the states to handle the Maoist menace. Some state level parties are hand in glove with these Guerrillas which jeopardizes the efforts of the machinery (West Bengal and Jharkhand and proximity to Maoists of a Didi or a Gurji is not unheard of). Are we in such circumstances committing the same mistake what America is making in AfPak war. There are so many similarities here, the terrain is difficult, the enemy is hard skinned and fighting with gusto, the growth and spread of violence is carcinogens and the local administration is double faced. Pakistan cannot be trusted in the Af Pak war, nor can the local state machinery be trusted against the Maoists.


If Article 356 can be used to dissolve or put in suspended animation the state legislature thus placing the state under direct federal rule, why can’t we legislate to bring a law which suspends / dissolve the state’s police department in the event of its failure to tackle the security and law and order problems?  Article 356 of the Constitution of India, gives the central government the authority to impose president's rule in any state if there has been failure of the constitutional machinery in the state. We can have a similar legislation to suspend the state’s jurisdiction over its police and the subject of internal security and police be placed in the center’s list (temporarily for the particular state in question) in the event of its inability to maintain law and order and suitably tackle internal security threats. A call for help by Omar Abdullah is a very recent example where a state government had admitted its inability to maintain law and order. Army is not the solution, as in cases of internal security threats Army is handicapped to perform in civilian areas.


Enough of lip service by the local states, if you can’t perform the function of internal security of your citizens effectively, let some one else do it for you. 






Wednesday, July 7, 2010

'We broke it first'



Testing the Hypothesis 'breaking news stories are the same as inside information'

News Channels take pride in boasting ‘we broke the story, first’, particularly Business News Channels where the story and its timing of breaking the news matters. I have some concerns on ‘we broke it first’ kind of news and they ring an alarm bell in my head. Isn’t it “Inside Information” if you have prior information of some key event that is likely to effect the stock prices in a significant way; and aren’t we restricted from trading based on inside information?

The king of insider trading, Hedge Fund Galleon’s general partner Raj Rajaratnam used his ‘sources’ to extract inside information on technology companies and generate alpha. He is behind bars and FBI is still struggling to get to terms with his modus operandi. I’m not placing the business news channels and their breaking news stories in the same bracket as the ‘king of good times’, but I am just toiling with an idea of testing the hypothesis ‘whether breaking news stories are the same as insider information’.


Lets imagine a situation wherein an analyst of a leading news channel (lets say ABC News) is following Reliance Industries and through his ‘links’ get to know that Reliance is contemplating an acquisition in the energy sector in US. The information is classified but the news reporter is convinced that he’s got a breaking news. He report the news to his editor in the expectation that it will appear as a breaking news but at the same time also asks his broker to trade Reliance stock (let’s say he orders his broker to buy RIL, considering the acquisition is at low valuation and favorable to Reliance). The story doesn’t end here, the editor too tells his broker to trade Reliance (buy) before approving the telecast of ‘breaking news’. Some ‘Shiren Bhan’ or the ‘pretty damsel, Sonia’ (in the pic) might present the ‘breaking news’ but not before they have asked their broker to trade Reliance. They may be a lot more links in the chain than just the analyst, editor and presenter all of whom may share this inside and classified information to generate excess returns. It would not be wrong to assume in such a scenario that enough trading will take place based on the above inside information to influence the stock price of Reliance in a favorable direction. The inside information gets priced in the stock value and the stock price moves to a new level.



Let’s say we move ahead a couple of days and the deal indeed happens, Reliance buys an energy company in US at a cheap valuation and confirms it through a media briefing. There is frenzy for this news story all across business channels and newspapers. The retail investors believe this to be positive news and take a buy decision on the stock. However since the acquisition news has already been priced in the stock due to insider trading by the news channel and other links it generated, the stock does not show a favorable trend to this news when it is official made public.

Result, the retail investors gets screwed (again) and the news channel proudly proclaims ‘we broke the story first’. I have to say I fail to reject the null hypothesis that ‘breaking news stories are the same as insider information’ and as an investor I feel like a trumpet (vuvuzela) that anyone (including news channels, companies and other market participants) can blow at will.









Tuesday, July 6, 2010

Foolhardy opposition in India


Another Bandh, another attempt to derail the economy by foolhardy opposition parties who take their name literally and do little to act constructively. India was disrupted coz Mr.Advani and his bunch of  jokers and pokers believe common man is affected by price rise and increased burden by the deregulation of fuel prices. Agreed, even the government agrees to this, everyone agrees to this. What everyone also knows (even a grade 10 student would know this) that an expansionary monetary policy and supply side pressures (deficit monsoon and global economic environment) leads to inflation. This was expected and RBI and other stakeholders have already expressed their views on reigning in inflation in a phased manner by raising interest rates gradually to prevent stopping the economic growth engine.





We are coming out of extraordinary times and are fortunate to be unscathed and relatively insulated from the global events. What Mr.Advani and his sundries would also agree is that PIGS (Portugal, Italy, Greece and Spain) are facing debt crisis because of their excessive spending and high budget deficits. Their sovereign credit ratings (both for local and foreign currency) have gone for a spin and the spreads on their government bonds have reached alarming proportions. Global Investors have placed countries with high deficits and high GDP/Debt ratio on a ‘ratings watch’. G20 couldn’t agree less and all its members have vowed to half their budget deficits in three years and encourage fiscal austerity measures.

India is facing a fiscal deficit problem, thanks to subsidies (particularly oil and fertilizer subsidy), leakages and inefficiencies in implementation its public sector spending. States add more than a couple of percentage points to the overall fiscal deficit figure of the centre. Deregulation of energy prices (particularly oil) is at the heart of the fiscal deficit problem and the same was proposed and attempted by NDA when it was in power. So why oppose it now? Isn’t it an example of taking your name (opposition parties) too seriously. Politics is all about populism and its easy to fool the common man by tinkering with what bothers them in the short term (price rise) and leaving the long term prospects (economic growth and prosperity) in a quandary. A bird in hand is worth two in the bush they say; but this analogy is irrelevant if the two in the bush are mating and increasing their long term supply.

What was required instead was a demand from opposition parties to ask the government to explain and come clear on the steps it is willing to take to rein in price inflation (particularly food inflation). What was also required was asking for an explanation on the modus operandi of pricing mechanism by oil marketing companies after deregulation. Also the opposition could have asked from the government to explain how it is securing the energy needs of the country in the long term particularly with an eye on aggressive global acquisition of energy assets by China.

 Economies around the world are like fast running trains. The developed economies are trains that are way ahead of emerging and less developed economies though the developed economy trains have recently started running slowly. The emerging economies like China and India are the trains that are fast catching up with the developed economies. China is expected to join the league of developed economies in about 10 years and India is expected to follow soon. But if the passengers of our train keep pulling the chain at the drop of a hat and create ruckus, the train with a lot of pit stops will fail to gain its top speed and the catch up effect will get delayed.

Mr.Advani enough of your Rath Yatras and Bandhs, the common man is least interested in your circus. Get real and provide a constructive opposition. Else India will be a looser like you, always a contender for the top post but never getting to occupy it.  


Loss of business due to Bharat Bandh – Rs.10000 Crores (CII Estimates)


Sunday, July 4, 2010

Give me some Sunshine, give me some Rain !



A take on markets amid monsoon uncertainties

Its that time of the year when expectations are high and nervenous is abound. Markets are directionless and monsoon is playing tantrums again. Blame it on the global warming or thy neighbours (don’t we blame Pakistan for everything) but the economy, markets, industry, macroeconomic fundamentals and FM words everything is at a standstill (though inflation is inching higher) and waiting guidance from the rain gods. Will they or won’t they is the question and so much depends on how much deficiet or excess we are likely to see this year. According to the Met Department, rather leave it no one trusts Met department foreasts not even the Met Department’ s Chief’s wife.

So how to trade in this uncertainty ? Well I think we are likely to see some weakness in auto stocks particularly after they rallied in the last few quarteres and some (TATA Motors) are still showing robust growth numbers. High inflation, fuel price hike (deregualtion is likely to escalate prices even further), hardenening of input costs and pending rate hikes by RBI will cause some pressure on auto stocks. So if you are invested look at profit booking and medrating investments in this sectors with a short term view. Long term view is still positive for autos and holding small positions is still not a bad idea. Go short on auto stocks particualy Tata Motors (with August expiry), the high base effect is likely to taper off and high level of debt in the balance sheet may lead to some pressures. Reduce exposure (or buy puts if you may) on cement, steel and IT stocks with a view on July expiry and increase positions in Pharma and Mid cap banking stocks. Buy sugar and pulses in the commodities futures with August expiry (I foresee a deficit monsoon again).



Rate hikes are going to draw down bond prices so if you are still holding bond positions, you’r one optimistic person I must say. Any dip in markets towards 4900-5000 levels should be seen as a buying opportunity and pick up blue chip high beta stocks in each industry. Reliance Industry, HDFC Bank, SBI, Infosys, Tata Steel, ACC, Maruti, Tata Motors, Hindalco have a long term potential if bought at the right prices.



Disclaimer: These are all personal opinions, excercise due diligence before acting on any investment recommendations.

Thumbs up to Base Rate !

Base Rate ...Aha !



It will make the job a lot easier, not mine but of everyone in the industry and markets, particulary of the analysts. BPLR was opaque to say the least and even coming close of ascertaining it for a valuatuon purpose gave me goosebumps. Base plus a spread is good for valuation, peer comparison, scenario and simulation analysis, it sounds good practically for everything. Party time for high credit rating entities and junkies will atleast get to know how much credit enhancement they need to get low spreads.

Increased integration with the global practices will follow and alas foreign investors will feel less foreign when discounting their cash flows for valuuation purposes. Long live the Base Rate, may BPLR rest in peace.