Human memory is very Short…..In November 2008, one of India’s leading Investment and Merchant Banking and Broking Outfit strongly advised it’s clients to sell off their whole Equity Portfolio…I had blogged it too as it was extreme advice from a Leader..rare in itself

http://www.gauravblog.com/?p=360

• A Rare Technical Report from a leading Securities Entity has studied the Sensex trends for the last 30 years and made a call that the Sensex shows weakness as it has breached earlier in 2008 a five year support line and in early October has breached the 50 months average….Sensex has now entered a structural bear market….It will fall to a range of 5720-6750,eventually finding support in the range 6150-7150…Pull Back Rally can first take it to 11500 before it resumes the fall again…This is their BOLD STRATEGY recommended

               Only Trade and do not Invest

                         Do not average purchases

                                  Aggressively Sell off Portfolio

                                         Short the Market at Higher Sensex Levels

                                                Trade Long on further 10%-20% upside with Strict StopLoss

Since then the Sensex sought a low of 8000 again in early March 2009 and then has simply doubled inside six months…It never dived below 7000 and 6000…so there was no finding support and stabilising at levels of 6150-7150

If you had followed this extreme advice,you’d have booked all your losses and never had an opportunity through an equity portfolio to recoup the loss…quicker by averaging purchases…..worse you could have shorted a rising market and hit by a double whammy !…At 8000 you were seeking a further fall to bottom of 20% which never happened and you missed the 100% run

But Human Memory is very Short….This Entity is now ‘revisting it’s assumptions’ but it retains leadership position in the Investment and Merchant Banking Field and continues influencing many Investors…While flexing it’s Money Muscle it needs to flex it’s Mind Muscles too,especially before offering such extreme advice !

It’s your Monies at Stake…Think Rationally…Don’t Follow Advice Blindly…particularly extreme advice 

Honestly,I too was bearish at the time but held back such extreme advice because,as I told clients,once you sell all,you’ll never buy again for a long time !…and the markets after seeking bottoms will recover…such bottoms are great buying and averaging opportunities…Clients were pressing to adopt a strategy to sell and buyback on lower bottoms and I was holding them back saying what if your bottom never comes  and the market recovers !…This is exactly what has happened 

Clearly One should have averaged purchases and not have Sold or Shorted…clearly this was contrary to the extreme advice given by this Financial Powerhouse

Returned late night from Bengaluru at 1 am in the morning as Flight was delayed after delivering a two day Equity Workshop at the weekend…the  eight in a series for a Broking House…It was pouring as we drove to the New Airport,50 + kms away from the City…but we had a Mad Max Driver who drove as if his life,and ours !, depended on it ! weaving at 100 kmph through stranded cars in the fast flooding roads ! and despite incessant rain whipping the windscreen…paid a ridiculous Rs 260 User Fee to access the Airport

Had gone earlier on Thursday,to spend two days at a friend’s 75 acre farm, 20 kms outside Bengaluru,on the fringe of the Bannnerghata Wildlife Park…what a great break !…could hear the silence !…had friend’s three dogs ( Small Datschund and Large Dalmatians!) all over me…Elephants and Monkeys destroy crops and so commercial farming becomes a tedious affair …tried to spot a Gharial in one of his four water harvested ponds on the farm…it had probably slipped in from the forest through the canals….relaxed company , great organic food,fresh vegetables,fresh mangoes,fresh coconut water,fresh jackfruit and fresh rains !…too short a break,though !

Then switched to workshop mode on Saturday Morning….It was truly satisfying…When I threw the House open  for any questions on Sunday ,prompt came the first one “When will you come back to Bengaluru for your next workshop !?….Thanks! Karnataka and Andhra Pradesh ! for some great participation

We had some fun discussing Valuations of Reliance Industries,Satyam and Reliance Power and even Jaiprakash Hydro among others companies…and am glad you’ll were genuine in your reactions when we played the Integrity,Insider Trading and Irrational Behaviour Scenarios

Now you know how Mumbai,Vadodora and Rajkot got excited  on Reliance Ind Valuations in March and April 2009  at Rs 1100 to Rs 1300 !…maybe I should have come to Bengaluru first !

So all of you know what is the appropriate Valuation Basis to use for Satyam…and how you can make some money on it ,based on an event based risk in June 2009 ! 

You are now acquainted with the Valuation Risks of Reliance Power at Rs 180 and Jai Prakash Hydro at Rs 70 ! 

Shanteeth,I hope we do get to 23000 + on the Sensex in 2009 itself, as you aggressively suggested at the outset of the workshop based on Technicals…though  I showed you why it looks highly improbable on Fundamentals !…glad you loved the Book I gave you “Screw it ! Just Do it! ” by Richard Branson…now pass it on so someone else enjoys it too !

And Shiv Prasad,I hope you can now scale up your business by some rational thinking and by trusting more !…and not succumb to Improper Framing when applying Investment funds

And Vincent,you’re a good thinker…very few have sensed the reason why ,that when one’s business is not doing well and the product is not selling , you raise the price and the product starts selling !….Economics would have dictated otherwise.

And Prabhu,you’re smart…not many would have guessed why one particular Slot Machine in the Las Vegas Casino gave higher revenues to the Casino Owner

And Nagendra,as you touch 60,the need for protection of wealth needs to be re-emphasised when growing it !…actually to ‘Protect’ and to ‘Grow’ Wealth is the Prime Function of Asset Allocation and Optimal Portfolio

We played out Investor Mistakes and the Reinvestment Risk…we discussed Investor Icons,Warren Buffett and Peter Lynch and their Investment philosophies and whether we can apply these in India

We discussed Concepts of Value v/s Price,Beta and it’s role in Hedging,Valuation and Investment Strategies…..Global and US Economic Crisis and it’s Impact on India…are we decoupled enough ?…our Fiscal Deficit Problems and our Extraordinary High Government Borrowings to fund Non Plan Expenditure,especially Defence and Subsidies

We saw the Market Dynamics impacting the Sensex…it’s macro valuations in the past and levels projected based on Earnings and Multiples…the Sensex CAGR over 5,8 and 18 years

We saw the impact of FII Inflows and Outflows from 2005 to date in 2009….How FII’s have reversed outflows and May 2009 itself saw an inflow of US $ 4.14 Billion !…and if US $ 10 Billion more comes in,as expected this year,how it will continue to fuel the Sensex 

I’m sure I’ll be back in Bengaluru !…maybe we can all have the workshop in Mauritius as we discussed when computing the Interest Cost on the EMI Scheme of ‘Fly Now,Pay Later’ covered during the ‘Time Value of Money’ session !

Cheers !

So the Sensex surged,ten days consecutively, to 11284 yesterday, and then quickly corrected sharply down to 10947,down 337 points today…It was just above 8000 in early March,a little over a month ago

What do you make of it ! ?

Two camps here :

The First Camp is Bullish and  talks of a Bull run happening…We’re not going to see October end Lows again….Supporting their view are two powerful indicators

• Sensex has just breached the 200 DMA and has a long way to go…China is already 14% above it’s 200 DMA…so it’s drawing Inspiration from this
• FIIs, who had reversed over US $ 2 billion in the first two months in 2009, have being buying into India in March and April to bring this figure down to close to a Billion now

This Camp clearly believes that upward Momentum will continue…They would probably affirm that the Sensex can be at 15000 even if the Dow drops to 5000!…that’s a decoupled view emerging 

The Second Camp is clearly worried and cautious at this rise in the Sensex…It’s at best a strong Bounce back in a Bear market.

They are more concerned with Valuation,both Macro and Micro, rather than Momentum…At 13 times,both Current and Forward, the Sensex is not really great Value…Looking outside the Sensex,the risk, as measured by Volatility, is getting higher.

Their fears are largely founded in the two “E’s” 

• Earnings  : Clearly Declining…Infosys has already issued a strong caution…Reliance is an exception
• Elections : No Clear Mandate Expected…If The Coalition is not headed by Congress or BJP,the stock markets will react

  Which Camp are you in ! ? 

MOMENTUM or VALUE ?

TRADER or INVESTOR ? 

TECHNICAL or FUNDAMENTAL ?

Go ahead with your Strategies…as long as you’re aware of the risks involved…I won’t grudge  you,your profits !…you took the risk for them !..Not I ! 

Sensex has climbed above it’s 200 DMA Levels and is currently 11200,pushing upwards…Nifty too is at 3450 levels

Caution is advised…We’re now at 13 times…Elections are on us and the mandate is unclear…Infosys has just announced lower earnings expected for FY 10…Satyam legal hassles begin playing up in June with the Upaid Trial….India’s Fiscal Deficit is already way beyond target at Rs 330000 crs + for both FY 09 that has just concluded and even that estimated for FY 10….Global Crisis continues to play out

Too many Low Cap and Mid Cap scrips continue hitting upper circuits…some would say this is a broadbased rally….I would say it’s a sure sign of being sucked yet again

Would be well advised to consider selling off into strong rallies and higher levels that this upward momentum is driving markets to,ignoring valuations

Essar Oil is a one off situation…Look what happened to Akruti

Don’t get sucked in yet again !

Assess Valuation Risks before Buying in 

Ooof !…Yes,I’m not a Technical Guy…but just received another Tech Report from a leading listed Broker,who just laid off 70 people on Thursday….It’s a conflicting and bullish view

It predicts that the Nifty will surge 42% to 4250 within Four to Six Months from now….that would mean a Sensex Level that goes past 14000 again in the first half of 2009

Such Conflicting Views at either end of the Opinion and Prediction Spectrum are the Challenges one confronts often in Equities….That’s the Beauty of Equities…there is always a Buyer and a Seller at a point….as Warren Buffett would say “Who says Market’s are Efficient !?”….and that’s the reason he finds Value at times…such as like this  

I’m not into Technical Analysis…more a Fundamental Guy…but count as some of my close friends and associates,some leading Technical Voices in our Stock Markets

So as this week closes with the Sensex hovering around 10000 and Obama winning the US Presidential Elections , I was taken aback  when these Technical Voices made some very intense,bold and scary Long Term Calls

• A leading Technical Chartist ,who heads the Derivatives Desk at a leading Institution and who appears on Stock Channels regularly and is known for his macro calls,more than specific scrip calls has warned that for 9 years Stock markets will remain challenged and whatever big fall will happen…. will happen now in November itself

• A Rare Technical Report from a leading Securities Entity has studied the Sensex trends for the last 30 years and made a call that the Sensex shows weakness as it has breached earlier in 2008 a five year support line and in early October has breached the 50 months average….Sensex has now entered a structural bear market….It will fall to a range of 5720-6750,eventually finding support in the range 6150-7150…Pull Back Rally can first take it to 11500 before it resumes the fall again…This is their BOLD STRATEGY recommended

               Only Trade and do not Invest

                         Do not average purchases

                                  Aggressively Sell off Portfolio

                                         Short the Market at Higher Sensex Levels

                                                Trade Long on further 10%-20% upside with Strict StopLoss

• Another Technical Chartist,a Lady, who breathes the markets daily before she even breathes in oxygen, and who depends on Time Series Analysis, has said that the Sensex will tank in November,pull back in December and after January 10,2009 will resume it’s fall big time in 2009….Sell and Short significantly in the December rally is her advice  

 So,if Technically and Fundamentally markets are projected to remain weak and challenged in the Short,Medium and Long Term can one hope to earn well in Equities from now on without Shorting them,but actually Investing in them ?

I believe one can….with astute selection of scrips invested at their distress prices…at a Sensex level of 8k and below you’ll see these prices emerging on BSE….so even if the macro Sensex remains depressed or range bound ( check out my Sensex projections for 2010 on the Pages on the right), the scrips selected would outperform the sensex

So one scenario is clear !…..you will not see a Sensex level of 20000 for a long, long,long time !