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 https://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 read more

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 read more

Sensex at 11200 ! Risk to Continue Riding the Momentum is High…Caution Indicated

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 

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 read more

    Ab Kya Kare ! ? Should You Buy,Hold or Sell ?

    Washington Mutual (WaMu) ,one of USA’s biggest Banks was forcibly taken over by the regulator,FDIC yesterday and sold off for US $ 1.9 Billion to J P Morgan even while the Chairman and CEO of the Bank was on a flight in Mid Air…The quick move was to prevent a collapse as Depositors had already began a run on WaMu and withdrawn over US $ 16 billion in the last ten days

    As we move towards Panic,Capitulation and Despondency in Equities with the Scenario in USA turning scarier than ever a lot of friends,family, clients,associates and even my Pay and Park Attendant are asking me “Ab Kya Hoga ?…Ab Kya Kare ?”

    This is what I strongly advise…..

    We are surely moving towards Distress Prices on the Bombay Stock Exchange and the National Stock Exchange…With the continuing disturbing scenario unfolding scarily in USA,there is clearly more Pain ahead in India as Dalal Street gets Wall”ed in

    Critical Valuation Basis remains on Assessing the  Sustainable Growth in Earnings…Here is the Problem….Clearly we are seeing a rapid deceleration in the Earnings Growth

    The Sensex’ earnings grew by nearly 17% in the first Quarter ending June 30,2008 in the current FY 09 supported by a 33% yoy growth in Earnings in Capital Goods Companies and a near 30% growth in earnings in Telecom Companies and a strong 44% growth in Earnings in ONGC. However, the Sensex (excluding the oil companies) saw an earnings growth of only 12.5% yoy during the quarter…..the lowest in the last fifteen quarters…compare this with the peak 40% growth in the December 31,2006 third quarter of FY 07  

    EBIDTA Margins contracted by 1.8 % and are expected to contract yet further.Metals and Pharma were the saving graces and saw some margin expansion

    The Earnings Momentum  going forward will continue to be impacted by hardening Interest rates and double digit Inflation and an economy slowdown,notwithstanding the Minister of Finance yet assuring of 8% GDP Growth this year assuming strong domestic consumption and Investments

    From a closing Peak of Sensex of 20873 in January 2008,the correction has been a mighty near 40%…With Wall Street resembling Ghost Town,the Sensex Slide should continue to distress Levels of a P/E Multiple of 9 and 10 ( Last seen in 2001)…With the remaining quarters in FY 2009 expected to reflect continuing slowdown in the  earnings growth  I expect the FY 2009 Sensex EPS to be around 950 levels…This gives a macro Sensex Valuation of 9500 thereabouts on a derating P/E Multiple of 10…that’s another 25% to 30% drop from current Sensex levels of 13000 to 13500…yesterday it declined sharply by 445 points to close at 13102 read more