What will happen in the next two months

Are we heading into license Raj ?

The UPA government is bent upon taking back the country back to dark ages where every commodity under the sun was controlled; no work could happen without the usual greasing the levers of power. Everything was under the control of the bureaucracy. Inefficiencies were rampant, people with the right connections could only prosper. Ironically the very person who broke the shackles then in 1991 is at the helm. A lot has been said about how the inflation is rising due to supply side constraints and inefficiencies – there lies the conundrum. To increase the supply you need money to fund the capital expenditure to produce more, by constraining or implementing any sort of price controls the money supply will be choked and will go back to the sub 5% growth rates - those dark ages of 1970s and 80s

The government first killed the Sugar sector by the export ban and then by raising the MSP for cane with an eye on UP elections (the sugar sector has been underperforming since last year). Now with the pseudo controls both on cement and steel – there are chances that there will be limited new investments. I am sure the Holcim, Lafarge, Italicementi would not have bought into Indian companies had they any inkling of what was coming – they have made significant investment in ramping up the existing capacities. The biggest problem with cement is that it cannot be exported in large quantity unlike steel. So we have situation – the sector seems to be heading for a significant correction (anyways the valuations were not very compelling)

In the past every central minister worth his salt has flexed his muscles to prove who the boss is. Ram Vilas Paswan one of the specimens I can remember – introducing curbs on drug prices. There are definitely better ways to stop the corporate sector from profiteering if that what this quasi socialist government thinks. Ms Sonia Gandhi by raising the bogey of aam admi time and again is queering the pitch further. More and more ministers are assuming powers which should be left to the market forces (enough checks and balances can be brought) . The oil sector is in dire straits, ultimately the subsidy is borne by the taxpayers – cannot come from the sky.

If these short term actions are justified –the government should show thought leadership and remove the supply bottlenecks. The telecom and aviation sectors are prime examples. Today Bharti has a market cap of 25 USD Billion +. The prices are today nearly one tenth of what was in 1994. The current Indian growth story may not last long with the structural imbalances in the global economy. Its time to take stock and address the real issues at hand rather than the knee jerk reaction.

PS: The inflation numbers anyways don’t make sense as the weight age of different commodities is absurd. Ex – Sugar has 2.5% weight

Moving averages

Current index : 3760

Moving averages are perhaps the simplest measures of indicating the market trend. The fact has been corroborated time and again. Though it does not give any advance indicators of the market trend like the Elliot wave and other advanced technical tools but still reliable. There are moving averages to indicate short( 5,20) ,medium( 50,100) and long term trend ( 200) - we also have the simple and exponential moving averages.

The Nifty in the current fall clearly took support at the 200 DMA ( 3550 range ) not once but twice. The fall was propitious after breaking the 50 DMA ( 4019 ) which will become a significant resistance for any market rise, though there are resistance points based on other technical factors. I feel the market will go down below the 200 DMA this month - I have not seen any kind of capitulation and panic selling happening which is important for the markets to keep rising in the long term.

What a fall

Current Index: 3594.05

I never imagined that 3600 would be achived with such a ferocity. The lacklustre PC's budget coupled with the profit booking across the globe added to fuel to fire. As it stands we should have some consolidation around these levels as the 200 DMA is very nearby. The pain now will be to identify the stocks that will go up. Typically if the index is negative the stocks also feel the pressure. Sector wise IT is in for some harsh realities going forward. The 40% growth rate may not be viable and we might have a round of correction in the IT biggies. PSU banking seems to be a safe bet but the upsides are capped. Textiles have been given a new lease of life but most of the stock are underperforming for quite a number of quarters. Cement has been hammered out of shape and with PC's eagle eyes on the sector - it will be long time before the shine can come back.

As usual very difficult to pick the bottom and no one as ever advised to do that. Lets see at what levels do we consolidate.

Markets are getting jerky

Stock markets seem to be very nervous ahead of the budgets.. there is the lurking fear of the FM introducing/extending some market unfriendly measure - even a nominal increase in STT or short term capital gains tax can act as a dampener on the sentiment. The markets at this point in time don't have a major reason to go up. Results have been upto expectation and as the old adage goes "the only way when you are the top is to go down". Any analysis will show the indexes holding at this level is just because of the 4 heavyweights -Infy, Reliance, Bharti and Reliance. Most of the other stock movements have become non events. Mid caps as usual get hammered even in the smallest of corrections. The index might correct 5 % but they will be down anywhere between 15% to 30%.

It seems prudent to be in cash and partly dilute and en cash any major gains. In case of any major correction the Nifty can go down to 3600. Which is a good 10% from the current levels - which doesn't seem entirely un-plausible having seen 10% index dips during last year's steep correction.

Global acqusitions

I am no great financial analyst to comment on the recent spate of global take overs by Indian companies of Global giants ( Namley Tata-Corus, Hindalco - Novelis ) and even the small buyouts by a whole host other listed entities but couple of things surely come to mind is first the acquisitions have happened when asset prices are at the highest be it stocks, reality and even bond yields so there is an element of speculative bubble built into the acquisition price. In case of Tata Corus which went through the auction the price was definitely higher than what Ratan Tata would have liked to pay. Secondly most of the acquisitions are 100% cash( stock swaps are impossible ) being mostly funded through debt - with the interest rates rising there is bound to be pressure on the acquirers to justify the prize catches to the shareholders and lenders. With the asset expansion cycle in its fifth year there is bounds to be doubts on how long the rally going to last. A lot of these acquisitions are of companies in various commodities which definitely have their business cycles and again most of the are going through their peaks ( though the take on each case can be different)

Contrast this with how LN Mittal built his empire - acquiring companies down in the dumps and at very cheap valuations which gave him the leverage years later to mount a takeover of Arcelor which was still cheaper than corus plus it was not 100% cash deal as the other Indian deals. Where does this leave us ? Only hope that the synergies as the managements have doled out come faster and they dont get bogged down by integration pains.

Incidentally today's pink papers carry couple of stories in detail.

Economic times - Investors guide
Business - Standard - Smart Investor

MGF a hidden reality play or a hoax ?

There is a lot of news about the EMAAR- MGF reality joint venture. It is supposed to get the largest FDI in the sector and a lot of PE funding. Actually the joint venture partners are the owners of a finance company called Motor general finance ( MGF ) listed on both NSE and BSE. The balance sheet is just as bland as their hire purchase and leasing business. The JV is expected to come out with a 700 crore public issue and they are one of the major players in punjab. The pointed to be noted is who holds the shares in this company. The details are not forthcoming and the promoters seem to have conveniently blanked out the equity holdings page in the MGF finance website.

The problem with the stock is that its either on the uppper circuit or lower and there is no justification to buy the stock purely based on the existing business. The dope is that some informed circles are into this stock from a large industrial house. Take your pick