Crude oil crisis

2006 was the year of crude oil. The statement may look sarcastic but its true in literarily sense. Throughout the year speculators were optimist that in no time price of sweet crude oil will reach magic figure of 100$. Hedge funds, private commodity market funds and numerous small time investors queued to get a piece of that expected price appreciation. Then the time came and like any other overheated market crude price crashed. Some of the funds lost their shirts.

Inflation in crude price also raised question of economic vulnerability globally, many people chewed their nails in thinking what could be possible effect on business if situation persists. The reasons behind such international anxiety following any appreciation in crude price are mainly two folds –

· Alternative energy usages are still in nascent stage
· Price trend in crude oil hardly follows economic fundamentals

It’s the second factor that’s disturbing most. Nobody, out side the producing countries, has access to the actual database regarding actual storage of crude. These are recognized as safeguarded information. And that’s the major problem. As no body knows, how much of crude oil our planet is still holding, it becomes difficult to fathom actual supply potentiality and market moves on short-term political and geographical disturbances.

Same thing is again building up in Iran. Some small time political disturbance is again ready to heat up crude price. If Iran stays affirm on its stance and decline to accommodate UK authorities in military detention case, already politically disturbed West Asia may get into another air pocket. Crude price has already reacted positively to this issue and in future we can witness some more bumpy rides.

The Week Ahead 26/03/2007 – 30/03/2007

First of all, I should say sorry to my readers since these days I am coming up with very less amount of posts. Professional commitments are major factors. I will try my best to post regularly.

Introduction of financial derivatives is undoubtedly the major financial milestone of last century. The idea of derivative instrument was common in commodity market since historic age. But this was applied first in financial market only in the middle of 20th century. Since then, use and variety of application has increased in many folds. This has, in one hand, made way for leveraged speculation and on the other side added complexity in the scenario. Breadth and width of the financial markets have also increased. Today global investors, with better risk appetite, regularly use derivatives to gain from global market trends. As these instruments are highly leveraged, they service these positions with highly analytical stance. For any change in the parameters (like interest rate, market variance in any country and many others) if their risk management model indicates slightest trend reversal, they do unwind their positions. These often make the market volatile.

In recent days we have experienced two such cases – unwind of yen-carry trades and crash in US sub-prime lending market. In both of the cases, over leveraged market positions reacted badly and concern was same for them and that is rising interest rate.

These two global practices have created ripples in Indian equity market, both directly and indirectly. Unwind of yen-carry-trades has affected India directly by pushing the Japanese capital out of the country while sub-prime lending market mishap has weakened the global sentiment.

After several weeks’ down trend, Sensex closed positive in weekly chart. For last quite a few days, I remained bearish over the market, but the major incident that I had discounted is phase of f&o contract rollover. Through out the month nifty future remained in discount. So large amount of short positions were open. Even 60% rollover of the total open shorts can push the market up and that’s what happened in the market last week. Huge volume in F&O segment simply indicates the fact. Over 300 points of rally from the bottom in Nifty50 has been experienced. And it closed pretty above my decisive level of 3850. This is a strong signal. But there is no strong news around. Besides, inflation counter is not in much good shape. It’s still clocking at near 6.5%, which is pretty higher then the rate (5-5.5%) targeted by RBI. Even with a bonus of Rs. 100/- per 100 kg, government remained unsuccessful in convincing farmers to sell their wheat to the government. Public distribution can potentially get a hard hit. And if inflation number take any more jump, monetary authority can come up with more tightening. That would undoubtedly spoil the investors’ sentiment.

So, concern regarding further down side is not completely wiped out. Consistency above 3850 will indicate a consolidation in a range of 3750-4000 for Nifty50. And if my doubt emerges as a fact then we can expect more downside. I am extremely sorry if I am hurting your bullishness.

The Week Ahead 19/03/2007 – 23/03/2007

Through out the last few write ups I figured myself as bear for a time being. Without any prominent fundamental support I decided to call current down trend, as an initiation of interim bear phase. This decision, even, failed to earn much of my own confident. But as days are passing by, I am gaining confidence over my forecast. I often said, price study or technical analysis – whatever be the tag you attach with, price movement of any asset class leaves lots of clues; one can potentially track them and reach the point of causality. But this style of analysis often creates confusion incase of prejudgment. Lack of evidence makes analytical explanation bit difficult.

As of now, situation in India is no gloomy. Other than few tax proposals in budget, no serious hurdle is visible before corporate India. Consumption demand is not going to die down. Industrial production is not showing any sign of tiredness. But despite all these things, some problems are raising their hands. And they are inflation and interest rate. These two is no Indian product, they are global phenomena. China, ECB, Japan – almost all of them are raising interest rate to curb the inflation. Indian central bank is thinking no different.

Other than few typical sectors, Indian companies are not much debt-ridden. Historically they were on surplus capacity and for last few years they are getting a chance for fuller utilization of their capacity. As they use more and more of their capacity, a business urge for capacity addition emerges. Especially capital goods and construction material companies are on capacity addition mission. They are trying both organic and inorganic routes for this purpose. But in both the cases they can face huge interest burden. In coming days if the situation sustains, debt-serving cost of these companies will definitely increase. Once moderate interest rate helped these companies to taste supernormal profits (one can argue!!!) and following that profitability concern equity market enjoyed bull ride. But recent rising interest cost will definitely affect profitability, at least for short to medium term. And I feel current down trend in share prices is just an effort to discount these unavoidable drags on profitability.

As the levels for Nifty and SENSEX haven’t reached the targets, I am still holding on previously settled levels. If in between the market starts showing different colors, we will need to sit with our chart book again. Till then good bye (!!).

The Week Ahead 12/03/2007 – 16/03/2007

Often time I hear people saying, technical analysis is for analyzing short term price trend and accommodate swing or short-term positional traders. Bundles of tools and indicators have been introduced to the financial world. Analysts keep on using them to get a sense of market movement. And accordingly, give their trading calls. Often in brokerages, so-called technical analysts report trading calls, support and resistance levels for any asset price and so on.

While world remains busy in all these things, we do forget the basic foundation of technical analysis. It’s not moving average, stochastic oscillator or bollinger band, it’s only and all about the traders psychology. A technical analyst’s basic objective is to decipher what the market participants are thinking at any given price situation. And they check price movements to identify any possible price trend. Price of any commodity or financial asset is the single most important thing that indicate demand-supply situation in the market. And demand-supply is the lifeblood of any market. If anybody analyzes these two sides of the market properly, will find out the basic ingredient behind the price move and price strength. I cannot say why this is called “technical analysis”, but irrespective of the time period such type of analysis often leads to prejudgment. While fundamental essence is intact, technical analysis may show a possible trend reversal and puzzle the analyst. So he tries to figure out the fundamental evidence and manipulate his analysis to make it more acceptable (as nobody likes any bear prediction!!). Besides, every type analysis is probabilistic in nature; so all the indication cannot be full proof.

In last few write ups I have said that I am expecting an interim bear phase in Indian equity market. But everybody out there in the market are very much vocal about the economic soundness and corporate performance. I cannot deny that even. So I was not much confident over my forecast. I even tried to present some supportive news article in my favor and indicated that the week would be decisive. The week is over with spectacular move on Thursday. Inflation figure is out and it has increased marginally. But I am still stick to my last forecast regarding interim bear phase with possible down side of 3250-3300 for nifty50. Though no confirm supportive news is out there in my favor, I wish to rely on cumulative wit (and market psychology is nothing more than that). Current price move is still not looking strong and can potential break some strong supports. Lets wait and watch, how far right the price indication is this time.

Cement price, government regulation and economic shame

For last few days, an undeclared war was going on among business media, cement manufacturers and commerce ministry and obviously first two parties belonged to same side. Whole thing started with finance minister’s proposal to apply an excess amount of excise tax on cement if they fail to keep the price low. How much ever ridiculous the proposal might be, it fueled the question of rising price of cement and its contribution towards on going inflation.

Following the tax proposal, cement plant owners did increase the price further by Rs. 12/- and that aggravated the issue. Suddenly, tax proposal issue and its possible implication on latest price raise, preoccupied the market. Government’s ego got tempered and commerce minister Mr. Kamal Nath started bailing out statement regarding possible application of regulatory cap on cement price; he even threatened to ban the cement export. And after few days, today cement manufacturers’ association decided not hike cement price for complete one year. Following this decision Mr. Kamal Nath declared, something in line of a payback cheque, that they are considering possibility of rolling back of the proposed excess tax duty.

The funniest part of the whole drama lies here – weightage for cement in WPI is only 1.73. Cement price is increasing, and it increased at 14.2% rate for the week with 6.73 inflation. But effective contribution was much less to the inflation. Cement price in India increased for few things like, increased transportation cost, sudden seasonal mismatch in demand and supply and increased cost of inputs.

If we segregate Indian Cement plants, they are of two types – north Indian and south Indian. Combinedly, current capacity utilization is almost at 90%, with an installed capacity of 165 Mt. India is going through a massive infrastructural development phase. It’s fueling the cement demand. It will last for coming 3-4 years. As capacity addition process takes long gestation period, cement manufacturers often increase price to match the demand mismatch. It’s common market practice. Besides, high input price also compels them to hike price. And there is no illegality in it.

Cement is no essential commodity, lesser or no daily consumption of cement doesn’t kill people. It’s just another construction item. Increased price of cement makes the project costly, but that no way create day-to-day penury for common people. Again construction jobs can be of different types – ranging from bridge and roads to luxurious entertainment center and villas. Their necessities/essentialities are different, and off course road is more essential to luxurious villas. Increased cement price will make both of the projects costly. That will again raise those projects’ prices and demand for less essential commodities will shrink down to some extent. This will again adjust the demand for cement and some price correction will be experienced in short term. This whole process is basic nature of market economy. And this way market clears out any demand –supply mismatch. If such mismatch persists for quite a long time manufactures go for capacity expansion and as capacity increases better supply lower the prices.

Market economy in its purest form is hardly followed in any country. Statutory bodies often interfere with the market mechanism to implement their social obligations. And such inference reaches extreme point when government follows arm-twisting to regulate price and try to impose some exogenous price on the industry players. This has happened in case of Indian cement companies. Government could have done much better by following less regulatory but more effective policies like, cutting import tariff, lowering transport cost and facilitating more rail transports etc. Policies meant for better supply would have solved the problem in smoother way but putting cap on the price will definitely aggravate the scarcity, as we have seen in license era. Even, government regulation can potentially weaken investors’ sentiment and huge capex plan for the industry may suffer fund shortage in coming days. Time will ultimately show what’s in it but this anti-reformist practice from government side will definitely have lasting effect – both politically and economically; reformist Finance Minister and Prime Minister just can’t deny the charge.

“Dow Theory, Indian Equity Market and near future possibilities”: some updates

In the last article, I raised a question regarding possibility of Indian equity market, entering into an interim bear phase. And my alibi was Dow theory. We know, Dow theory has two faces, technical and less articulated fundamental. My finding regarding movement of Nifty50 complied with the technical criteria but I was not much sure regarding the fundamental soundness of my finding. Readers would recall that I had sidelined the fundamental issue by relying on “ average discounts everything”.

Here I would like to take reference of a news article published in “The Telegraph” named “Crisil sees a slowdown in growth” on 5th February’ 2007. This rating house is expecting easing in the pace of India GDP growth rate for the year of 2007-08. Factors behind such possibility, as they have pointed, vary from slowdown of American economic growth to global inflation of factor inputs. These incidents would potentially affect the sales or the production cost or the both in coming fiscal.

It’s too early to comment confidently on these issues. But such concern, nurtured by CRISIL, is no separate incident; few days back, former Fed chief, A. Greenspan also expressed some concerns in the same line. And that surely affected a segment of the market.

Personally, I am still not seeing any serious concern. It’s true that inflation is there and that can spoil the sentiment directly or indirectly; but in Indian case, a good and timely monsoon can change lot of the things. Tough we cannot deny, if global economy faces any blue, Indian economy can hardly escape in today’s global village.

www.telegraphindia.com

Dow Theory, Indian Equity Market and near future possibilities

Dow theory is considered as the father of all modern day technical analysis. According to the theory, if Industrial Average and Transport Average break any crucial support or any crucial resistance then market is expected to show some definite direction. Until and unless both of the averages moving in synergies, no trend is confirmed. But this technique was meant for US equity market and averages under consideration are Dow Jones Industrial Average and Dow Jones Railroad/transport Average.

Other than the technicalities, Dow theory also considers fundamental valuation as mode of trend identification, though Robert Rhea latter lowered the stress on fundamental valuation arguing that average discounts everything.

But in its true form I have hardly seen anybody applying Dow theory in Indian equity market. If we consider the valuation front, then economic health is still intact. GDP growth projection is optimistic; there is no dearth of demand. Only matter of concern is inflation, but that too under control to the large extent. So still there is hardly any economic malfunctioning ahead. But Rhea has said, “ Average discounts everything”. And if we have to follow his advice we can say our economy is going to hit a submerged iceberg, since nifty 50 has broken 3754 and closed below that, the last crucial high attained by it on 10th May’ 2006.

I am not confident on my finding. As I have not applied Dow theory in its original form. Besides that today’s markets are highly globalized, market participants are too emotional and noise is much more than earlier days. But if I am right and Dow theory succeed this time also, then we are just on the threshold of month long bear run. I still believe bullishness is intact at least for Indian market and bear can rule for short to medium term only. Let’s watch the market with fingers crossed.

www.dowtheoryproject.com

The Week Ahead 05/03/2007 to 09/03/2007

Market plunged severely in last half an hour on Friday and SENSEX closed at 12886. we can identify two distinct reason behind such abrupt move. Firstly, part liquidation of the yen carry-trade. Most of the global markets including, India, china, USA lost heavily last week. These declines dried out liquidity partly and generated global concern for some sort of forthcoming recession in US market. Simultaneously global inflation is cutting down real returns from risky asset classes. Despite the fact that yen carry trade is still profitable to the extent of 4% to 6% in Indian case, lowered expected return from risky asset classes encouraged a segment associated with carry trade to liquidate their position. Secondly, legal action against 13 employees of some of the US investment bankers, with the charge of insider trading, created of anxiety in the market. This news might be of lesser importance but played an active role as Morgan Stanley and UBS are active players in India and some of the 13 accused belong to these two houses.

Part liquidation of yen carry-trade is a serious concern. These funds often inject impetus to the over retraced markets. Currently, India is to some extent over sold. December quarter result was encouraging. Strength in economic growth is intact. Inflation is going down steadily. Budget is more inline as it was expected from Finance Minister. Other than some taxes, budget is no way anti-corporate. More over FM reiterates his stress on infrastructure, agriculture and rural economy. So at this moment no serious negative fundamental/economic turning point is visible.

But still there exists some haunting issues. First of all retail investors are not coming in flocks. They are to some extent scared regarding the direction of the market. Their absences do impoverishing Indian equity market from experiencing liquidity. At this point of time, unwinding of carry-trade positions would potentially aggravate the situation. If the story goes on like this, then we can witness SENSEX breaching more and more supports in coming weeks. Better valuation of stocks may attract more “buy and hold” investors, but that would not initiate any firm rally.

After more than 3 years of secular bull-run Indian equity market is now facing a hurdle, in coming 1 or 2 weeks we can see some major decisive moves. And those may confirm market’s intention for the first half of the year.

Union Budget 2007-08 and few issues

Union Budget 2007-08 was made public on 28th February, for last two days the budget documents went through numerous forensic studies. So currently, I find no use of reiterating the things those have remained as news headlines for these two days. But I had some basic expectations and I would like to frame them and in the light of this budget I wish to share how much of those requirements have been fulfilled.

First of all, inflation data for the week ended on 17th February is recorded as 6.05%. After reaching of 6.73%, a record high since 2001-02, for consecutive two weeks we are witnessing improvements in prices across the segments. I discussed earlier in other columns that current inflation is very much cyclical in nature and actual fact is also supporting our idea. But the most annoying issue is the contribution of primary goods in the inflation. Major reason is poor performance from farm side. As we know, our farm productivity is not keeping pace with the demand for primary items. Besides, excessive monsoon dependency is adding to the production fluctuation. At current stage when country is going for structural shift in growth pattern, industrial expansion and service sector boom we cannot afford inadequacy or price surge of primary items since this may affect domestic demand for manufactured goods and services. So I expected, our reformist and futurist Finance Minister would initiate some bold steps regarding rural infrastructure and agriculture. Though this budget is tagged as pro-agriculture and pro-rural but I hardly feel so. Total allocation to agriculture and allied services has increased from 20% for last year to 21% (approx) this year. If we add on funds allocated for agriculture & allied and rural development (including irrigation, water recharge and water-bodies restoration) the total allocation has been increased only by 0.75% from last year, which was at 34% last year. Requirement is no less, tax collection is outstanding but allocation seems hardly changed. 25 lakhs hectors has been proposed to be added to total irrigated land, projects has been initiated regarding water-bodies in various states, but they are not looking sufficient to make any immediate impact.

Secondly, cement sector has been taxed. Criteria for taxation are retail price. But, ceteris paribus, it is difficult to administer such tax on pan-India basis. Besides, the pivotal price of 190/- per bag of 50kg, fixed for the tax benefit, is not at all an industry standard. In northern India, retail price is much higher than 190/-, so in that region cement price is going to go up. An extra excise duty won’t affect companies’ profit. They will simply pass on the burden to the consumers, and instead of checking the inflation, this will aggravate the situation. So, logic behind the proposal is not very much clear.

Other than these two, one important thing addressed in this budget is slashed peak custom duty to 10% from 12.5%. Custom duty has been exempted for coking coal and that’s good news. RRBs are allowed to accept, which is another crucial announcement; this will ultimately solve the fund shortage in RRBs. Deepak Parekh committee’s recommendation regarding financing the Indian infrastructure projects are encouraging. Another new idea has been introduced in the budget and that is reverse mortgage. It was obvious that India will see full-fledged mortgage market within years. And that process has been initiated, though guideline has not yet been declared but basic structure has been outlined.

Other than what I have discussed, there are lot many things which can demand attention in the budget. But I don’t wish to go into details. I hope, latter when it will be needed I will try to address those issues.

indiabudget.nic.in

eaindustry.nic.in

finmin.nic.in