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August 2009

When Strong Investment Advice from a Leader goes Crazily wrong,it’s not the Leader who suffers !

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

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  • 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 read more

JUST BUY INDIA !…GO LONG FOR THE LONG TERM….AT 202 % IT TOPS THE WORLD IN EQUITY RETURNS OVER 5 YEARS!

 

COUNTRY COMPARISON

 

FIVE YEAR EQUITY RETURNS FROM 2004 to 2009

 

 

Sr

 

Country

 

%  Returns

 

1

India

202

2

Brazil

143

3

China

112

4

Russia

82

5

South Korea

74

6

Hong Kong

50

7

Singapore

31

8

Spain

21

9

Germany

19

10

Australia

12

11

New Zealand

4

12

United Kingdom

(5)

13

France

(16)

14

USA

(19)

 

BRIC Countries have cornered the Top Four Positions in Equity Performance over past Five Years…and the 21st Century is relatively young

It’s the exciting combined Dynamics of our Classic Pyramid Demographic Profile and the freeing up of our Markets through the continuing Reforms that is unleashing the Power of India and reflecting in this superlative Equity Performance

Clearly there is a techtonic shift of economic power happening from the West to the East…and the excitiment is that this will sustain for decades to come in this century

I shall blog later in detail on the demographics of India…but I can give you a feeler now….Our Country is Young….Around 350 Million are below 15 years of age…that’s nearly one/third of our population…..Nearly half of our Population of near 1.2 billion is below the Age of 25…two/thirds,around 750 million are below the age of 35….and we should see the pace of economic reforms pick up fast with the Congress getting a clear election mandate

India is the place to be…it has begun to play out the twin growth propulsion drivers of Huge Infrastructure Developement and Surging Domestic Consumption

Short Term Adverse factors like Drought situations,Falling Exports,High Fiscal Deficit,FII Outflows and Stretched Valuations should not cloud  or adversely influence your Bullish Long Term View on India….GDP Growth rates are expected to recover to 9% by early 2011

So a safer strategy would be to hold a Long term view and take opportunities to buy on significant corrections as adverse short term factors play out their poison,rather than short the Nifty or the Sensex

Stay Invested in Indian Equity…Get Invested in Indian Equity…Increase Investments in Indian Equity

On a macroview,our Sensex,currently just under 16000,up from a low of 8000 in March this year,will not only cross the January 2008 Highs of 21000 in a year or two ,but move past 25000 by 2012 and at 18% CAGR ( It’s long term average annual return) is scheduled to cross 50000 by 2017……You’ll have to live with high Volatility as Sensex can correct significantly before continuing it’s upward trend…so a passive Investment strategy to buy into the Index will make you good returns in the long term but may cause some heartburns in the short term

But if you want to beat the Index,then stock selection becomes important and a bottom up strategy,increasing exposure to low and mid caps may well define great returns…Stay true to your Risk Profile when you to take this increased risk and look for market inefficiencies for great opportunities   read more

Adani Power Struggles on Listing today…saves face by closing at Issue price of Rs 100

I had warned you on July 25,2009 that Adani Power (APL) may not have an exciting Listing…Though the grey market Premium of Rs 10 had indicated listing gains……Check out my take on the APL IPO

IPO of Adani Power at top end Rs 100….Aggressive Pricing makes it an Aggressive Investment

It listed today and struggled right through the day to stay above it’s Issue price of Rs 100…Clearly there was some directed Market Making so that it closed at a face saving Rs 100

If the Sensex seeks 13000 on the downside…It’s at 15000 levels today…. as India grapples with a Drought Situation and Rising Fiscal Deficit and Significant reversal of FII Flows in recent days,you can bet APL too will slide below Rs 90

Now watch out for the NHPC Listing in early September ! It was issued at an expensive Rs 36…Government was greedy….but so are the applicants !…Hoodwinked by the Hype,the Issue was heavily oversubscribed..NIB Portion 57 times !…I have bet you’ll get NHPC below Rs 30 shortly after Listing 

Pity all those who went for Leverage for better allotments…As it looks now,and with even historical evidence supporting,the only people who are laughing their way to the bank,having earned sure interest,are the Financiers.

Valuation Props you up…Hype knocks you down….What should you rationally choose ! ?…Make that Choice when another PSU,Oil India launches it’s IPO in early September…It was to come at Rs 800…Indications are Government wants Rs 1400 !…should be easy to make a rational choice at Rs 1400 ! 

Remember that Merchant Bankers appointed as Lead Managers have the Mandate from the Government  and the Company,not from you !…and Investor Protection and Education is merely Lip Service from the Government when it comes to Pricing  the PSU IPOs !…Aggressive Pricing leaves nothing on the table on Listing for the Investor..only the Risk !

So if you are a Long Term Investor and do like the Company ,but the IPO price is too Aggressive,then it’s safer to skip the issue and take a chance of acquiring the Shares at a lower than IPO Price in the Secondary Markets in the future

Think about It…Think Independently…don’t follow the Herd ! and don’t help in the Heavy Oversubscription of the IPO at an Aggressive Price…Remember Reliance Power in early 2008 !…The Lesson does not appear to have been learnt ! 

Warren E Buffett warns of the ‘Greenback Effect’

Warren E Buffett,while warning of consequences of the ‘Greenback Effect’,  is bravely being Optimistic and Patriotic ,like every true blue blooded US Citizen should be !

Says Buffett, ” The United States remains by far the most prosperous country on earth,and it’s debt-carrying capacity will grow in the future just as it has in the past”

Check out Buffett’s Op-Ed Column in yesterday’s edition of New York Times

Buffett is happy that Obama and his Men showed the much needed Wisdom,Courage and Decisiveness required to address the US Financial Crisis…He urges them to continue this Momentum and make some hard decisions

USA ,maybe out of the ICU,yet remains in the Woods…financial situation remains critical….Fiscal Deficit will climb to 13% of GDP this year…that’s US $ 1.8 trillion Dollars…This would be funded half by a Net Current Account balance of  US $ 400 billion(China-Foreign Debt Dependence)  and Expectations of National Savings of US $ 500 billion and that these will be routed through the Banks into the Economy…The other Half Funding of US $ 900 Billion will probably be from Fresh Printing of New Currency Notes

What if China reduces,or even halts, it’s Investment in US $ Treasury Bonds for fear of a Weakening Dollar !?…Currently it has an exposure of US  $ 800 Billion in such Bonds in it’s  FX Reserves of US $ 2 Trillion…China,while retaining it’s US exposure, may opt to Invest the Dollars it’s earning from US exports,in other US assets,like Real Estate,Stocks and Buyout of Companies ,rather than in US Treasuries

The Net US Debt will climb to 56% (from 41%) of GDP…that’s a huge US $ 7 Trillion of Debt

There are paradoxical and Catch 22 situations that exist….The USA Citizens need to both, Save and Consume ! to stimulate the Economy…the former will help in Capital Formation and the latter will stir demand and revive American Industry…With Unemployment at 10%,where is the Income in the first place for Millions of the American Workforce !…Yet,when Push has come to Shove in USA,we’ve witnessed Savings climb to 5% from lows of 1% and 2%

Obama’s stimulus packages may have prevented a collapse and depression and a meltdown but the critical growing levels of Fiscal Deficit and National Debt and their adverse Impact on the Dollar is causing sleepless nights,not just in USA but the World over read more

Calamity Drought and you yet want the Sensex to continue to Celebrate !?

So it’s finally Out…it’s a drought…the short term Monsoon,rather the lack of it, trigger begins to impact the Sensex….I had warned about this on June 24,2009……Click on

 Monsoon Fears fuel Sensex Fears

Liquidity and Momentum and Pacifying,Assertive and Assuring Government and Experts Voices in India and overseas had kept our Sensex on track for new recent highs…Irrational…given the fact that Markets had run ahead of Fundamentals yet again and the Monsoon factor had been ignored

It’s been an amusing few weeks….signal to noise ratio from the Channels continue to emanate static…..when the Markets kept rising,experts began sprouting out of the media woodwork,boldly justifying it…when they fell,they are justifying this too !

Be warned…when Investment and Merchant Bankers become really active…it’s sucker time again ! 

Valuations be damned !….Go for the Hype…suckers…Go for the IPOs…suckers….wanna bet Mahindra Holidays will go below Rs 300,it’s issue price ?…it’s 330 right now !…and wanna bet NHPC too will be available below it’s IPO Price of Rs 36 shortly after it gets listed !?

Get Real

China was down 5% today….This was the trigger…..Sensex,following cue, has crashed 640 points to 14772 as we near closing today

Get Stock Specific with critical weightage to both,relative and absolute Valuations…you’ll be safe…don’t panic that one short term factor of a  bad monsoon can destroy your long term portfolio..Lucrative returns continue to beckon in the long term

Now you know why I’ve not been in any hurry to buy in !..To be forced to make Long Term Play decisions in the Immediate Term,so as to not miss fast upmoves, is a sure recipe for expensive buying ….haven’t we all learned that before !?

As I blogged on August 4,2009 that I was not comfortable at Sensex of 16000…it had run up too fast…18 times Current Year Earnings…it needed to correct to 13000 to sustain a healthier move forward with a three year outlook…In this context,I’m comfortable now with this correction…Hope it continues…It would provide cheaper buying opportunities..New Clients should be happy to be in cash as we delayed creating New Portfolios

Cheers ! 

Sesa Goa sinks 10% to Rs 228 as Government finally announces Higher Mining Royalty…Worried ?

This Blog Piece is to address the responses of Madhu and P P Jain…welcome Jain…this is the first time you’ve taken the trouble to respond

The New Mining Royalty Policy……It was awaiting Ministerial Approval………10% Mining Royalty on Market Prices before Freight…a move away from a Flat Rate based on Weight

Today,the Ministry finally went by the recommendation of a specially constituted panel of 2007 to impose a higher Royalty rate of 10% and change the basis from weight to Market Price

This announcement had been expected for a long time now…but when it came it sunk Sesa Goa’s Share Price by 10% this morning…It closed at Rs 228

This Rationalisation of the Royalty Policy was part of the 100 Days committment of the UPA Government…it had proposed to adopt wherever possible the advalorem basis

The Last Policy was notified on October 14,2004 and for three years,no change would have been possible…The Study Group formed in 2007 gave their recommendations to the Ministry of Mines in October 2007…However this recommendation was delayed as Global Recession set in and Iron Ore Prices weakened considerably

Under the Old Flat rate Royalty Policy,the highest Rate was Rs 27/T for Iron Ore Lumps that had 65% Fe Content or more

Now under this new market FOB Price,less Transportation and allied costs to Ports,the Royalty will be 10% of the Adjusted Sales FOB Price

From April 2009,the CIF price to China has doubled to US $ 110/T….Adjusted FOB would range between US $ 60 to US $ 80…that’s Rs 2800 to Rs 3800 per Tonne…10% Royalty would range between Rs 280 to Rs 380 per tonne…that’s over a ten fold jump from the earlier Policy basis  

Should we be worried ?…Madhu and Jain queried for my comments….well it will surely affect export competitiveness

Sesa Goa sold over 15 million last last year and has ambitious plans for volumes ahead…50 million tonnes in three years….so we can estimate that incremental  Royalty payments for Sesa Goa will start to be in excess of Rs 400 crs….Though Iron Ore Prices are again rising,the exports market remains competitive and the risk is that Sesa Goa may not be able to pass on the entire incremental to China,it’s major market…Sesa Goa earned  a shade under Rs 2000 crs PAT in FY 09…thus the immdiate impact looks to be 20% of profits

Having said this,Sesa Goa could absorb this on rising volumes and rising Iron Ore Prices read more

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