When Inflation plays Runaway Bride

India's Inflation is a lot like Julia Robert's role in "Runaway Bride"(1999) ...and is catching global attention for refusing to be tied down despite several measures over the last 9 months or so. I happened to read Mike's latest post on Indian Inflation...it talks about how India's inflation has been driven up by food and fuel prices, how faster growth in Bank credit (the amount banks give away as loans to corporates and individuals) than in Bank deposits (the amount banks receive as deposits) has led to liquidity crunch, and how India (along with China) is going to "overheat and crash or their economic growth is going to slow dramatically, quite possibly both."

Before we move ahead on this, please note that Mike Shedlock (popularly known as Mish) is one of the world's best and arguably the most read blogger on global economy. So much so that he was even covered in NY Times recently as one of the ideas / trends for 2010. Check that link out, it talks about how post 2007  DIY (Do-It-Yourself) Macroeconomics - ordinary citizens as econo-bloggers have flourished on the internet, many with their own hypothesis and conclusions on how global data should be read and understood !

Having said that, I think while the analysis is correct, the conclusion being drawn here that India and China are overheating and will crash, is flawed...(and no, I'm not taking it personally !) Let's first start by understanding where we're coming from... Here's a chart of interest rates movements over the last couple of years...

Follow up - Developments on earlier posts

Thought I'd do a quick follow-up on the various posts posted earlier to gauge if the analysis and thought process was at least in the right direction...and also to make note of further developments on some of the topics covered. This post also introduces a video on this blog and a really interesting document, via embedded "Scribd". We'll also take a look at some other improvements that I've made to this blog. Hope you'll enjoy this read...

Banking on Global Scams

There is this interesting piece of journalism from NY Times. It talks about how a handful of banks are keeping the multi-trillion dollar derivatives trading to themselves, especially in Commodities markets.This is really interesting, and it exposes us to a world which is widely spread, but little is spoken and written about it...(and even lesser blogged!)... the world of commodities trading and hedging. Let me first start by explaining how and why Commodity companies use derivatives for hedging.

Dope 'em - Dec, Jan Effects of Markets

Just some of the similar events that took place simultaneously across the world:

• S&P 500 Index Climbs to Pre-Lehman Bankruptcy Level 
• Seoul shares hit 38-mth high as worry eases
• European shares hit 27-month high
• Nifty crosses 6k, Sensex crosses 20k after 5 weeks
• Nikkei hits 7-mth closing high on bargain hunting
• Copper and Cotton also moved up higher, Coffee jumped to a 13 year high (its definitely on caffeine !)

Apparently, the reasons for all these highs include:

• China backing the efforts put by Euro zone to contain the crisis (like there was an easier choice to make; besides, is China signaling a similar action being taken under similar circumstances is justified for them as well?)
• North Korea has backed away from threats to retaliate against the drill
• Mining companies rising on higher metal prices, (helping European shares edge higher)

Random Walk - The Paradigm Shift in Enterprise Solutions Sales

The Crisis that started with Lehman fall, really did change a lot of things on the ground...the way people looked at their businesses, the kinds of risks they were prepared to build in into their decisions, the casualness with which purchase decisions were made (all in the hope that this boom is going to go on forever), including even the sales presentations they gave and received! Yes, trust me, I have seen this difference although it took me some time figure out the shifts in patterns. However, whether this transition in sales presentations had started before the crisis and only got the final push post crisis, or it started only after the crisis and gained traction as time passed...is difficult to say, but a paradigm shift in the entire approach of Enterprise Solution Sales has been there for sure.

As a part of the Random Walk series on this blog, I thought I'd cover this intriguing topic about how not just the presentations, but the entire approach towards Enterprise Solution Sales has undergone a sea change. But before that, just to bring everyone on the same page, let me define what I understand by Sales of Enterprise Solutions...

Understanding China and Japan

I usually don't put a post that's just a review of a post on some other blog...but I'll make an exception for this one...Here's a conversation posted in John Mauldin's Outside the Box section, with Vitaliy Katsenelson (VK), the Chief Investment Officer of Investment Management Associates Inc., and the author of Active Value Investing.

Long but amazingly well-done interview...real perspectives on China and Japan, put in a simple way, with applicability to the rest of the world, more specifically, the US.

I'll summarize VK's point of view on China, but this summary will be as much a substitute to the interview as a trailer is for a classic movie...so do watch the trailer, but don't miss the movie...!

China is a bubble which will burst eventually, due to the following reasons:

US Housing - Interesting developments & Interlinkages with Australia

US Housing starts have risen for the first time in the last 3 months...according to a report, housing starts rose to a 555k annual rate (annual rate implies that based on last month's increase, if the same increase is taken for the rest of the year, you'll close the year with 555k number. Its like saying if my revenues for Q1 of this year were 10$, my annual rate of revenue is 40$ ($10*4 quarters)). However, the building permits fell 4% to 530k annual rate.

Let's first start by understanding what "Housing Starts" means...

Uncertainity is the new trend

I spent quite some time thinking up the title for this post, 'coz the points I'm about to cover in this post are neither bullish nor bearish...and it all rolls-up so differently for different countries, despite being ever more interconnected with each other. Its' like playing a game of chess, but with 10 boards kept beside each other, with the possibility of moving pieces of one board to the other...imagine the possibilities...the inter-connections...the complexity of the game...

Something similar is at play here, and like I've said in my earlier posts as well, the players are central bankers and governments more than the usual market players...who'll decide which way the game goes.

Some Questions for 2011

Fidelity has released a list of questions, pretty interesting ones...(HT: Pragmatic Capitalism) so I thought I'll try and answer some of those...and raise some of mine as well. In this post, I'm only going to pose the questions...I'll need time to compile these answers, which I'll post as a follow up post just before the New Year...and compare notes with the markets by the end of next year.

These are really interesting questions...and like someone said, a lot of times its the Question that's more important than the answer...! Take a look at the questions, all related to markets, global economy, etc. and think about them...If you would like, let me know what you think about some of these questions....

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• Is Euro zone going to fall apart? Will Euro cease to exist as a currency?
• Which countries in Euro-zone are getting into trouble next? Will anyone default?
• How will the currency war be played out between US and China?
• Will the US Economy recover?
• Are Gold and Silver the new proxies for currencies? Will countries start dealing in Gold and shun dollar completely?
• Will the bull run in commodities continue?
• Will emerging markets (EM) remain the driver of global growth, even though China and other countries are counteracting the Fed’s monetary policy?
• Will Inflation in EMs come down?...And finally,
• What is the outlook for INR-USD and Nifty?

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Now, each of these could be a research topic, but I'll try to answer as many as I can before new year...and also try and keep it simple...Please let me know if you'd like me to include something else in this list.

Trading Strategies

Have you ever felt that you're too small (or retail) to make big money in the markets, and the big guys take all the profits...or that you wish someone would give you a magic wand which will show you a glimpse of today's market's closing prices at the beginning of the day...or that you're trying your best to trade but somehow the stock moves up only after after you've sold it? Well, i won't give you my magic wand (:)), but can tell you about how I deal with these nagging queries.

This post is about various Trading Strategies that are used by retail people, people like  you and me. I've tried to cover as many as I can think of / have used at sometime or the other...please let me know if there are any I've missed and I'll add them as an addendum to this post. I'm sure among those of you who trade, (not necessarily for a living) you've also used some of these, but the point here is in figuring out if a little improvisation is possible. Note that some of these forms could be quite India specific (like IPO Trading), but the rest are fairly general and are applicable to almost all markets.

• Tip-based Trading:

This is the most popular form (and arguably the least rewarding) of trading - the only variation here in different cases is the source of the tip. The sources can vary from friends, acquaintances and brokers / broker reports to Electronics and Print media. Now, this form of trading is really tempting, with no underlying rules / analysis from our side...someone tells us what to buy / sell and we do it...hoping that that person has done enough research. 

But more often than not, these tips are released at the fag end of the move...so your risk - return ratio is not very tempting (buy something for 200 bucks, stop-loss 190, target 210 for 3 - 5 days, gives us a risk-reward ratio of nearly 1 (5% / 5%), which is not very tempting). The reason risk-reward ratio should be taken into account in every trade is because no one can make money on all the trades...so lets say, out of 10 trades, you went right 5 times and wrong 5 times. Assuming you had a risk-reward ratio of 1 every time, and you managed to keep your stop losses and target strictly in place...you'd have made 0 bucks !


Thus, with such forms of trading, the reduced effort on analysis needs to be compensated with far higher efforts on trade management. You need to always be on top of your positions. Some people use these tips to identify stocks with interest of large operators. The operators are a reality of the market...they pump in / take out huge money in small / mid / large cap stocks and cause significant movements therein. These tips only tell us, which stocks operators are / were interested in...


Just as a parting note - if you do trading based on this style, have you ever measured how much your returns have been on an overall basis (year till date) / how much the stock has moved in anticipated direction before and after the tip? If not, I recommend that you do this analysis, I'll definitely open your eyes to some new insights !

• Twitter based Trading

Ideally, I'd have liked to include this as well in the above section, but since its a relatively newer form of receiving tips, I decided to have a separate section on this. Twitter is a good source of getting accumulated tips from various sources, all at one place...(I think this is the best use of twitter, don't really know what else people would want to use Twitter for ;)). And you receive tips at the speed of light. Just follow various broking houses / independent analysts / brokers / print media tweets, etc. and you'll remain on top of tipping world !

But again, just like above, use this with your own discretion. Use these tips to identify stocks which are on the move, analyze those (its not too difficult)...and take a call on a case-to-case basis. Overall, this form of trading reminds me of a quote from someone during 2008 crisis - "Its amazing how world keeps finding new ways of losing money when the old ways seemed to be working just fine...". I'll always remember this quote ;)

• IPO Trading

This is generally regarded as a risk-free trading strategy. Apply in IPO, it opens up anywhere between 20 -200%, sell and get out of the stock...Instances of IPO opening below IPO price is far lower than otherwise, so it is a good strategy that yields decent to excellent returns. But here as well, some research on the company (whether to apply or not) and money management (how much to apply, also, which ones if multiple IPOs are open) will definitely help. One not so difficult way of doing this (atleast in India, not so sure about other markets), is to see the premium being quoted in the grey market.

The grey market starts predicting the gains per application (each application of 100k / 200k) well before the IPO closes. These rates are available on various websites...and are a decent indicator of how the IPO is going to perform.

• News based Trading

This form involves tracking news (publicy disclosed, potentially having large effect) and trading based on that. For example, if interest rates are increased, the markets usually will not like this as it is a sign of Central Bank cooling off the growth, or if industry specific / stock specific news is released, people will quickly take a stance on that and trade accordingly.

The essence here is that of both analysis and time...you need to understand firstly, whether the news is good / bad for a particular stock / industry / market. Secondly, how large could the potential impact be (a company instead of posting 15% top-line growth in a quarter, posted 17% growth - its positive, but the news will get incorporated in the stock as soon as it is released). And thirdly, you need to implement the conclusions from the above two points quickly....'coz as soon as the news is released, market players with ready access to trading terminals, (and of course, quick fingers) will take the lead in entering trades. But large impact news is usually analyzed thoroghly in trading rooms End-of-day for large trading houses...and they adjust their positions over the next few days...So you still have time to move and run with the majority of the profit leg.

I've known a few people who trade on this form (among others). I'd say, if you have a macro & micro perspective, there is no dearth of data coming in everyday...from inflation figures, to unemployment, to bond market movements, budget sessions, quarterly results, housing data, confidence level in businesses...all you need is a keen eye, an understanding of the potential intensity and direction of movement, and of course, quick fingers...!

• Analysis (Technical / Fundamental) based Trading

This form of trading has seen most amount of ink flow under it. So many, so many readings are available on this, that I dont think i can ever do justice to this form by getting into the details. One of my personal favorites on Fundamental Analysis is "One Up on Wall Street" by Peter Lynch. Simple and applicable....just the kind I prefer. Technical analysis is also fairly widely available on the internet, including free e-books and numerous articles.
Which approach you'd like, is something you'll have to figure out on your own...I've moved between both fundamental and technical to a point where I look at both now...and weightage given to these techniques differs based on how long I'd like to hold the stock....(fundamentals for really long term, technicals for really short term). If you're going to start with technical analysis, I'd suggest that you take a subscription of an online technical analysis tool which has data for your market...generally such subscriptions are not very costly ...(approx your monthly phone bill) but will enable you to implement your understanding well.

• Strategy based Trading

Now, this is where quants come in and retail sits back. Apart from a few guys here and there, I've not seen too many people dealing with this form of Trading. In strategy based trading, you need to have some kind of strategy - it could be an arbitrage strategy, or stats based strategy, or based on some kind of algo which tracks fundamentals & technicals both and suggests the best buys / sells...or anyhting else. This form is not so well written, and is also kept close-to-their-hearts by whoever has devised the strategy.

One of the popular strategies is called Pair Trading...in this strategy, the price ratio of a pair (logical one - like MS and Oracle OR Citibank and BankAM) is tracked. Under normal circumstances, it would move within a fairly narrow range, but if the ratio goes 2 or 3 standard deviations above or below normal, you can take a long position in one and short position in another. E.g. If Oracle / MSFT ratio is 1.075, and if it goes suddenly to say, 1.11...you can see if this kind of volatility is normal or not, and if not, you can sell Oracle futures and buy MSFT futures at prices such that the ratio is 1.11 or higher. 

The assumption here is that in a few days, the ratio will come down to 1.07 levels or lower. For this to happen, there are multiple ways...either Oracle has to move down, or MSFT has to move up, or a bit of both. Alternatively, oracle stock price rises, but MSFT rises even more...OR Oracle falls, but MSFT falls lesser...in either case...you'll make money on at least one leg even after deducting losses made on the other.


Notice the beauty of this strategy, its market neutral - you don't care too much about which direction the market or these stocks move...all that you care about is one moves lesser than the other. In the Indian markets as well, there are several such pairs possible - Infy-Wipro, HDFC Bank - ICICI Bank, ACC-Gujarat Ambuja, TCS-Infy, Axis Bank - HDFC Bank....and so on. Now, its not that there is no risk here, the ratio may not come back to its normal levels before the futures expire, in which case you'll book a loss...but studied well and executed well, this strategy can potentially beat many other strategies hands-down - primarily because the risk involved in this is lesser.


There are other forms of Strategies as well, like Moving Average (MA) strategy, wherein - you buy whenever a stock's 20 day MA cuts 50 day MA on the upside and sell when its the reverse. There are multiple choices available here as well, 5-20, 10-30, etc. There are chances of a whip-saw, wherein, the 20 DMA cuts 50 DMA on the upside, you take a long position, and then soon after the stock goes down and 20 DMA cuts 50 DMA again but on the downside making you reverse your position. But overall its fairly simple and mostly effective strategy to follow...take a look at the opportunities available in Nifty over the last couple of years based on only this strategy. It can work wonders in trending markets. In the chart below, I've used 30-50 combination...check it out.

(Click for a larger image)

There are some other strategies as well, like Algorithmic trading, Basket trading etc...but those are advanced ones...may be in some other post...!


Please do let me know if you too use one of these / any other...I'll probably compile a list of those as well and make another post on that...

The Golden Era

Gold’s making news again…in the physical markets, its touched 21000 INR / 10 grams, (1423 USD / ounce), which is a historical high for gold. In dollar terms, it has given more than 25% returns in the last 1 year (last December, around this time, Gold was at approx 1135 USD / ounce - giving a return of nearly 290 USD / ounce). Take a quick look at how Gold has moved in the last 1 year:

Even at these levels, the best trading strategy on Gold that comes to my mind is - "Buy, Breathe, repeat...". There are a lot of nay sayers in the market who are (and have been ever since the resumption of the bull run) predicting gold tops, but gold just retraces back 1 step, and then moves forward 2...signs of a healthy up-move.

Reasons are not so difficult to fathom - fundamentally - its Uncertainty, which is mostly bullish for gold. European crisis is keeping a lot of investors edgy, for if Eurozone trouble gets deeper, it'll spread to US and the rest of the world as well. Currencies are no longer the IOUs they were a couple of years back. The confidence on Euro and Dollar has come down drastically, which is also reflected in the higher volatilities of these currencies against others. Brazil, China, Russia, Iran, and some of their trading partners are trying to move trading volumes to their local currencies. IMF has started taking money in Gold...Ireland is temporarily out of trouble, but people are holding their breaths for the next country in Europe - Portugal / Spain / Italy are the among the best guesses (wont' rule out punters punting on this also !).

US is no better. An uncomfortable chunk of people, who've taken home-loans and lost jobs in US are defaulting on their payments. Banks worldwide are taking ever increasing hits on their portfolios comprising of either home-loans / bonds issued by banks who have massive exposure in US housing industry. Rising unemployment, nearly no growth, and uncertain future of house prices is not making things any better in US. Even people who can afford to buy a house there, are waiting to see how low the prices can go...supply from builders is coming in, pushing prices down, and to top it all, banks are putting thousands of homes every month on the market to recover their loans partially. 

The US government is releasing money that can be used to invest in markets, give out as loans and used for capital investments, but with little success. Whether or not Tax cuts (introduced during the G Bush regime) should be extended is being fiercely debated...if its extended, Government's fiscal deficit will increase at a much faster rate (destabilizing the bond markets, pulling down the rating and currency), and if it doesn't, people need to pay more taxes, leaving them with even lesser money to spend, resulting in lower demand for goods and services - leading to economy contraction.

The local state governments in US are also reeling with debt, and are not sure if they'll be able to pay back all of it. In their efforts to cut costs, they are reducing people on state rolls, like police, teachers, park-attendants, cleaners, even releasing inmates early from jail ! But is it going to make things better - well, if defaulting in Feb is better than defaulting in mid-Jan, then yes. I'm not saying they are going to default in Jan / Feb, the point is, they cannot come out of this mess without huge borrowings from central government, which will then print money and buy bonds from these states, which will stoke up inflation, and bring currency down...There's just no easy way to get out of this mess for the US.

Real Estate bubbles are an issue in Australia and HK as well, and both economies are slowing down. With China bent on increasing interest rates and cooling the growth off a little bit, commodity exporting countries like Australia are likely to take a hit on their growth as well. Other SE Asian economies, meanwhile, are showing signs of slowing down.

Central banks, on the other hand, continue to hoard gold. China has bought over 200 tons of gold in the first 10 months of this year compared with about 45 tons bought in the entire last year and 454 tons bought in the last 7 years. And that's the information that's publicly disclosed. India and even Bangladesh central banks also continue to buy the yellow metal. Festivities are just round the corner.

With so much of uncertainty on various fronts, right from currencies, to growth, to economic and geopolitical stability of some of the world's most advanced countries, Gold has no other way to go but up....till the crisis at various levels is played out completely.

Follow-up - Nifty Trading Strategy

Nifty Trading Strategy, as posted on this blog on 25th of Nov, recommended selling a 5700 December Put option @ 95. Assuming you managed to sell it lower @ 90, the returns for 1 lot for 1 week weren't too bad...close to Rs. 3200...considering the current price is around 24. 

Here is a chart depicting how the price of that option and profit or loss on this strategy moved between that day and today...

(click for larger image)

The profits should still go further from here (meaning, this value of 24 should eventually - by 30th Dec - that's when this option expires, should go down to 0), giving a further upside of 24*50 = 1200 (50 is the lot size of Nifty options, so if nifty option prices move by Rs. 1, you stand to gain or lose Rs. 50 from that move).

The point I was trying to make in my earlier post was, selling index options although risky (theoretically, if Nifty went to zero, the above position would have resulted in a loss of 5700 * 50 = Rs. 2,85,000, while the max the above position can earn under any circumstance is 90 * 50 = 4500), but if taken with a view on Nifty, and played even conservatively, can yield decent profits with a fairly high probability of success. From here, even if nifty were to move down from current 6000 levels, to nearly 5700 points over the next 20 days, you'll still end up keeping the entire 90 bucks that you got by selling the option.

That said, selling options is not an easy game to play, the risks are huge and profits small...but it holds a far better profit potential than buying an option. But do understand the game first before you sit down to play it...

Random Walk - Nano's nano sales

I'm introducing another section on my blog - Random Walk - comprising of topics unrelated to markets, but important enough in their specific domain.

As my first attempt at Random Walk, I'll focus on the recent news article related to Nano's sales and how its pricing and positioning has gone completely haywire. We'll also take a quick look at what Tatas should be looking at in terms of strategic improvements  to rectify this situation.

Apparently, Nano sold just about 509 units in November 2010, giving the term "Nano sales" a completely new meaning ! Compare this with Merc's Nov 2010 sales of 518. Talk about low prices, low margins combined with low volumes - it's the worst nightmare of any business.

With Micro-credit going under just before Nano Sales, it looks like "small" is the new challenge for businesses. However, in both cases, there's nothing wrong with the business model per se, but with positioning and retaining the trust of clients. Just as an example, Tata promised more space in Nano as compared to its peers, and stuck to his promise - but by increasing the height of the car and reducing the length...so if you want more leg space, its expected that you wouldn't mind shifting your position by 90 degrees...;)

Even in terms of positioning, "cheap" will, and can work only in the initial stages of launching a product, but its been carried on for too long, with not much focus on quality. Besides, with the base version of Nano costing about 1.7 lacs, Tata has, somewhere down the line, forgotten the meaning of the term "positioning" itself - Positioning of your product is never what YOU think your product is about, its always what your CUSTOMER thinks what your product is about....and people most definitely will not consider 1.7 lacs as cheap...especially when a good product like Maruti 800's price is just round the corner.

Managing this kind of positioning is not just a marketing challenge, but a humongous operational challenge as well. I thought of a few broad areas which need work from Tata stable:

• With volatile commodity and currency prices, the Procurement and Finance departments need to have really tight budgets, as every dollar of overshoot will impact the nano-margins directly. Hedging of commodities and currencies can even be centralized for group companies (tata steel, TCS, Tata motors, etc.) to achieve efficiencies of scale.
• The pricing from suppliers has to be the best, and innovative measures need to found to make best use of Transfer Pricing Mechanisms (legally, if possible) [Transfer pricing - If Tata Steel sells steel to Tata Motors, they can price it close to their costs or even below it, giving Tata Motors an edge in their raw material pricing. This is called Transfer Pricing and is considered illegal as the pricing is not market determined, results in tax evasion and is also monopolistic in nature]. 
• Add some features that enthrall the customers - while still keeping the costs low.  
• Innovation is also required on financing customers, else, in this era of easy credit, low down-payment, the perception factor about difference in EMIs of Nano v/s M800 will be fairly negative.
• Internally, employees have to be proud of the product, its quality and its best-value-delivered status....for they are also the prospective customers of Nano. I don't have figures on this, so I'd really like to know how many people working in Nano manufacturing plant actually own one as well !
• Quality cannot be compromised on...all component parts have to undergo stringent testing, even if it results in some escalation of costs.
• Positioning needs to evolve from just "cheap" to something-to-be-proud of...like "Hamara Bajaj". Customers need to feel good while driving the car...I've heard of cases where people driving Nano have been sneered at by people overtaking the car...!
• The sales team needs to be trained, so that they don't get defensive about Nano's pricing and positioning.
• To maintain the margins, the incentives need to shift from pure monetary lines to value based...for example, a dealer selling more than X Nanos per month will move to a preferred-dealer list for Tatas, where the margins on other Tata products are higher. Launch a reward-points based approach for dealers and bulk-purchase customers...the reward points can either be encashed for various goodies ranging from Tata-Indicom Leased line connection at reduced prices, to TCS's consulting services for Business solutions...
• And most importantly, trust with various parties needs to be created and maintained...for example, news about Nanos going up in flames could have been turned into an opportunity by replacing those instantly and additionally giving the customers some free goodies...imagine the kind of news that it would've made...!

Overall, the thinking and culture in the entire system needs to change - because something new is being done for the first time in this world, the world's cheapest car has been launched in the world's fastest growing small-car market...the old / usual ways of doing business (selling Indicas, Safaris, Dicors, etc.) will not work here...something new is required, something disruptive, that can shake-up the system and show everything in a new light...

And till that happens, Nano sales will remain exactly that...