Equity Meltdown~Pulling out or Putting In!?

Equity Meltdown~Pulling out or Putting In!?

Answer this to define yourself ~ your Investment Mindset now &  your Risk Profile in general  ?

The Question should be surely in your Mind right Now as continuing Global Meltdown forces India Meltdown too with the Nifty & Sensex sinking over 3.3% today to go sub 7000 & 23000 respectively ~ down 23% in 11 months from the highs of  9119 & 30025  in the first week of  March 4,2015

Had warned you’ll in December 2014 that 2015 will be Volatile & Vulnerable and reiterated it several times in 2015….stated that 2016 looks more ominous

Worth reproducing this blogpost of mine of September 4,2015

Hoping for A Merciless Market for Higher Gains at Lower Risk !

Friday, September 4th, 2015

At the time it was of concern that the Sensex had gone sub 25500 but I yet had declared it was not a Merciless Market yet!….that’s when you can get into serious wealth creation opportunities at lower risk for higher gain !

Here’s an extract from what we had communicated  privately in early September 2015

_______________________________________________________________

Hi,

We have been quiet for a few months now for a good reason. Those who are on our fundamental wavelength know what we stand for. .Too frequent communications then would have served little purpose other than the danger of generating ‘Noise’… !

What we did assess with conviction was that FPI Inflows will ebb or even reverse in 2015 from the record inflows in 2014…another reason that should mute markets…as this was played out it was ignored by a frenzied midcap space market that justified it being balanced out by increased retail participation and absorption by increased Mutual Funds Investments 

On ET Now Prime time on March 31,2015 I had aired my fundamental views for the new FY 16 that was dawning to a wider audience than just clients.I had stated that the markets were running ahead of fundamentals

Yet the Smallcaps & Midcaps had raced away in a frenzied climb last six months too & we were being questioned  why we were being relatively more conservative with dependence on Core Scrips weightage as per Risk Profiling and Asset Allocation as a discipline and  refusing to trade in and out of markets furiously especially in scrips that were touted on the street or in stock chats or in networks or on the air by experts on popular stock channels and stock portals….most were justifying the run up and urging and seducing for more participation to those especially  who thought were missing the boat…The Young were inheriting Earth !   

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EXIT POLLS…EXIT MARKETS ?

What’s got this Sensex so excited that it surged 50% from 8000 to 12000 in two months !?

Earnings ? Elections ?…..what’s so exciting ?

Nana Chudasama’s Banner on Marine Drive in Mumbai states ” EXCITING ELECTIONS…SURPRISES,SHOCKS,SUICIDES”…….Surely you don’t find Suicides exciting ! 

Barely had the Fifth and Final Phase of Polling closed yesterday,several Exit Polls came out fast….predictably predicting a fractured verdict…with neither UPA nor the NDA Alliance showing any significant lead….Amusingly,many Politicians,like the Communist Karat and the Samajwadi Mulayam gave sound bytes that they don’t believe in Exit Polls….The real verdict is day after tomorrow…on Saturday….when our stock markets are closed…so how will they open on Monday ?

So,what’s it going to be post Poll ?…What’s Idealogy to Opportunism ! You’re going to see blatant and pretty blunt opportunism by ALL politicians and their parties in their endeavour to be part of a governing coalition

We’re paying the Price for Capitalism…Now we will pay the Price for Democracy !….Freedom is after all our birthright ! 

As for our Stock Markets…I don’t want to be a rally spoiler….but I do think global and domestic economic woes remain heady….for one,just look at our balloning fiscal deficit and the balloning government borrowings to fund it….I’ve blogged these in detail earlier….the next government is surely going to be  really tested in it’s decisions to stimulate our Economy….Exports and Aviation are clearing begging for sops,while Cement and Banking hold out some Hope

So,with prevailing Macros,I see a Macro Sensex Valuation range of 9000-13500 and the Nifty dancing between 2500 and 4000 for the next few months,giving Multiples of 10 to 16 on expected FY 10 EPS levels of 850-900…so in a sense,I see we are currently at 10% below the top of the range and 30% from the bottom….Now,you make the Risk Call 

So in the Short Term,if you’re an addicted party animal and can’t help but party with the Sensex and Nifty ,riding the momentum with the FII Inflows of US $ Two Billion in the past two months,then make sure you leave before the party is over…Get the Drift ! 

And Remember…when you hear FII heads talking of Compelling valuations ,increasing risk appetite and Monies waiting on the sidelines….it’s all relative really !…I see more Momentum and Liquidity than Valuations currently…and riding these is riskier

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Sensex and Nifty up 50% in Six Months !…Where to now !

On September 27,2008,seven months ago the Sensex was 13000 and I had put up a contrarion blog http://www.gauravblog.com/?tag=contrarion-investment-strategy

I had said the Sensex is moving towards a Distress Zone and will break below 10000 to provide a great opportunity to build wealth over the coming years…so one should bring in Fresh funds to top up their portfolios and not sell 

Just a month later,on October 27,2009 the Sensex dropped below 8000,having begun the month at 13000 levels….from there,six months later on May 4,2009 it is kissing 12000,a rise of 50 % !

Yes of course,there was a problem end October 2008 with both,Cash and Conviction….. most were simply just too reluctant and resistant to add to their Eroded Equity Portfolios,lacking either one or both….but some who did,have reaped good returns…Their portfolios have recovered faster than those who just stayed put.

For example a portfolio that had eroded 50 % from Rs One crore to Rs 50 lakhs in 2008 by October 2008,infused fresh funds of Rs 25 lakhs…The portfolio would be currently, having crossed Rs One Crore,  moving towards Rs 1.25 crs,thus recovering the full portfolio erosion…If this fresh infusion was not made the erosion would yet be 25% in the portfolio,whose value would have climbed but only to @ Rs 75 lakhs…In fact many scrips that had a brilliant 2007,like IFCI that touched Rs 130,have barely recovered from their 2008 crash…IFCI has moved just from Rs 16 to Rs 27…yet a far cry from Rs 130 !…making the recovery process that much more difficult…Unitech is another prime example…

However there is great Historic precedence in the Belief that Long Term Investors should never exits Shares of Core,Strong Growing Companies…..Reliance,Larsen,BHEL…..instead on significant declines like we witnessed in 2008,fresh funds should be infused to top up portfolios…the recovery is that much faster

As I end this Blog past 1 pm,the Sensex has crossed 12000 having  surged 607 points and 5%,while the Nifty is just a shade below 3650

As I blogged last week….don’t short this market…you’re up against Momentum and Liquidity….However do blend Optimism with Caution at these levels….Our General Elections Results will be out on Saturday,May 16,2009……You get a Hung Parliament….Expect the Sensex to Hang too !

The Jury is yet out on whether this is merely a strong Bear Market Rally that may last a few months…Commodity Guru,Jim Rogers thinks so…..or it is the confirmation of a new Bull Market…Mark Mobius of Templeton,Abbey Cohen of Goldman Sachs and even Fidelity’s Head think so

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Don’t Short this Market !..you’re up against Momentum driven by Liquidity

Don’t Short this Market !

Fundamentals and Valuations are being shrugged of by Increasing Liquidity and Inflows…This momentum is driving the Nifty and Sensex to new recent highs

Two Leading Broking Houses have literally overnight turned very bullish and talk of a Sensex range of 12500 to 14500 in the near term

Maybe they know where the Inflows are being sourced from and are possibly guiding them in !…Is there a connection with the outflows from Swiss Banks as the Swiss are gearing up to be more transperant and disclose names of beneficiaries of deposits if they suspect these deposits have not been disclosed to Tax authorities in the Country from where these Depositors originate !

And is there also a Connection with the General Elections !?… I remember the late 1980s and early 1990s,when I had authored a centrespread story for Mid-Day Publications on the connection between a short term Bull Run and  Stock Market Rigging and Manipulations and approaching General Elections….how Election Funds were created from Stock Market Gains…I had interviewed a leading MP,who candidly confirmed the connection but for obvious reasons refused to come on record and be quoted. 

If you recall,some of my earlier blogs on Indian Monies in Swiss banks…A report stated that India tops the List ! with US $ 1.5 Trillion stashed away in Switzerland

The BJP has sworn to go after these funds and bring them back to India,if elected back to Power.In fact just today,BJP leader and PM Candidate,LK Advani,has released a Report of Black Money stashed away in Swiss Banks by Indians.He has met the PM,Manmohan Singh on this and urged him to take action

Just imagine this power of Billions of Dollars  !…just US $ 17 billion FII Inflows in 2007 drove the Sensex up 47% past 20000 in 2007 and a combined US $ 36.4 b FII Inflows from 2005 to 2007 saw the Sensex move up 206 % in three years giving a CAGR of 45% !…and then in 2008 there was a huge US $ 13.1 b reversal and the Sensex decimated 53% to crash to 9647

POWER OF FII FUNDS

Year

FII Inflows in US $ Billions

Opening Sensex

Closing Sensex

% Move

2005

10.7

6626

9398

42

2006

8,5

9422

13789

46

2007

17.2

13828

20287

47

2008

(13.1)

20325

9647

(53)

2009

(1)

9721

11300+

16

In 2009,FII outflows had crossed US $ 2 b…they have been buying past month and just US $ 1 billion inflow has seen the Sensex  zoom 40%  up in just over a month from the early March low of 8047 to intraday levels of 11300+ on April 17,2009…Momentum is expected to continue with increasing Inflows and the Sensex is expected to move into a higher range of 12500 to 14500 in the short term  

 

Just Imagine if US $ 20 b has to flow into India as FII Inflows in 2009 ! It’s just 1.33 % of the US $ 1.5 Trillion stashed away by Indians in Swiss banks…Sensex will zoom past 15000 ! giving you PE Multiples of 18…..that’s a case of Markets running ahead of Economic and Corporate Recovery….What if the Recovery does not come this year !?

Clearly Markets,in the short term, are going to be more a Function of Momentum driven by Liquidity rather than Macro or Micro Valuations

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Sudden Fall in Equities soon !? I can Sense and Feel it…Better Hedge Equities Right away

As Wall Street slaps Washington,Dalal Street will damn Delhi too….It’s been perceived as a STIMU-LIE Package in both countries

Yesterday the DOW teetered more towards the Edge clsoing at 7466,the lowest in six years

It’s just past 2.30 pm in Mumbai and the Sensex and Nifty are struggling to stay over 8800 and 2700 respectively

I can sense and feel that soon,the Dow may just plunge 500 to 1000 points in a Day soon…we will follow as we too will test October 2008 Lows

This Intuition or gut feel is strongly supported by weakening macros fundamentals in USA particularly and the world over in general…The IMF has already stated that it expects many more countries to come to it for Bail-Outs

I was watching the classic Movie ‘Sea Biscuit’ last night on Star Movies…What a parrellel !…The Movie is about a Champion Horse and Horse Racing and is set in the times when America was devastated by the Depression of 1929…The Wealthy became Poor,literally overnight,and lost their Homes and All their Assets….they took to the Highways and settled in poorer conditions….It’s happening allover again,I daresay ! 

If disinclined to sell off equities at these low levels,atleast exercise prudence to fully hedge your equity portfolio right away

You can do this in Three Ways

  • Sell off All or Part of Equities…Hard Call at these Low levels already as Heavy Loss sitting in Portfolios…but it will give you Capital to Grasp Greater Opportunities ahead
  • by committing appropriate additional Funds and Investing in negatively or less positively correlated Investments to Equity…Silver and Gold as Alternative Investments run at the top of my mind  or
  • Go Short in Index or Specific Stock Futures or buy Protected Index or Stock Puts…by shorting Futures ,you are locking in the current value of your equity portfolio…so if the Market fall,so will the value of your portfolio…but this fall will be offset by the gains you make on your Futures Contracts that you shorted…..by buying Protected Puts,you pay the Premium to insure your Equity Portfolio from any Fall,while keeping the upside potential alive…this would seem the best strategy,if you need protection from significant downside,but don’t really have such an intense feeling or sense like I do that this will happen suddenly and soon…It is better to pay a 2%-3% Premium to protect from a 15% to 20% potential downside from here…The OPTIDX Nifty PE with Strike Level of 2700 and Market lot of 50 has a premium of Rs 47 and Rs 142 respectively for Feb 26,2009 and March 26,2009 contracts…You’ll be paying Rs 2350, that’s under 2% costs, on a contract Value of Rs 135000 for a week’s hedge and a high Rs 7100,under 5%  cost, for a month’s hedge…the underlying Nifty is 2717 and it’s just past 2.30 pm

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Sensex at 9200 and Nifty at 2800…..Historical US Data supports a further Fall in 2009

So we all now concede that India is not decoupled from winds blowing in the US Stock markets…The Draft reaches our Exchanges too !

So it’s going to be Dow (n) with the Dow for our Sensex and Nifty too !

Three Interesting US Indicators support a further fall in our Sensex and Nifty to possible levels of under 7000 and 2000 respectively in 2009

JANUARY BAROMETER

Yale Hirsch devised this in 1972…Simply put it states that if the S & P 500 goes in January so goes the rest of the Year

From 1950 till 2008,this has held good in all,except 5 years,giving a remarkable 91.5% success rate

In January 2009,the S & P 500 fell 12 %….except for relief rallies ,expect the rest of 2009 too be on a down trend

What traditionally happens in normal and positive times in January is that Institution Outlays come into the Market and so Other Investors tend to pre-empt and warehouse Stock in December

However in bearish times like now,Investors await January Institutional Demand to exit….Thus if S & P goes lower in January,it clearly points to selling pressure despite Some Institutional Buying 

DECEMBER LOW INDICATOR

Designed by Lucien Hooper,it simply predicts a further decline in the Market if the Dow closes lower than the December Low in the first quarter of the Calender Year

We have just begun February and this Low has already been breached…Since 1952 this has been proven 92.8% of the time

HISTORICAL PE

It has been generally accepted by Investors who hold a long term view that the P E of S & P 500 will indicate undervaluation at a level of 10,overvaluation at a level of 20  and Fair Value at a level of 15

But the contention is that this view is during a period of Higher Earnings Growth,Cheaper Finance and Leveraging

During a current long term scenario of an Earnings Slowdown and de-leveraging,Fair Value will be seen at PE levels lower than 15….probably 10…This is a justified PE derating

US Markets need to decline by 17% level and 44% level to reach Fair Value Perception at 15 PE and 10 PE respectively   

Have a look below at the historical PE of the S & P 500 (The Black Line) from 1925 till date against Relative PEs (Red Line PE 20,Blue Line PE 15,Green Line PE 10 )

Clearly 1990s and 2007 was overvalued….late 1940s to early 1950s showed PE levels below 10…From mid 1980s till date the PE Levels have remained over 15 in expectation of Higher Earnings Growth….Now with deleveraging and Lower Earnings expect the PE to be derated back towards 10 and even below to match the changing perception of Fair Value at a lower PE Level of 10

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