february 2013 monthly e-book from - investors are...

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February 2013

Monthly E-Book from

Editor:

Arjun Parthasarthy


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Table of Contents New Launches 4-5

Weekly Equity Analysis 6

Week ended 1st February 2013 7-10

Week ended 8th February 2013 11-14


Week ended 22nd February 2013 19-22

Weekly Fixed Income Analysis 23





Weekly Podcast Transcript 38





Economic Analysis 47

Expect a pragmatic 2013-14 budget 48-51

OPINION 52

Asian crisis has hit India, fifteen years hence 53-55


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RBI should go easy on new bank licenses 56-58

RGESS or regress 59-61

Classroom 62-64

Market movement analysis March 2013 65-68


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New Launches

2018 The next five years is going to be critical for the world and for India. Winds of change are blowing across the world and India is going to be right in the path of those winds. The winds of change in the next five years will have economic, political and social repercussions. Economies will have to brace themselves for the changes ahead and those able to handle the changes will grow and do well while those that are not able to handle the changes will get left behind.

India as a country has to set itself on the right economic growth path or else it is in the danger of getting left far behind other developed and other emerging economies. (Read Asian crisis has hit India, fifteen years hence). The positives are that the government has realised the issues facing the country and is attempting to do something about it. Diesel price decontrol, focus on fiscal deficits and focus on governance are positives for the economy. The negatives are that the country has dug itself deep down into the ground and will find it difficult to extricate itself. High fiscal and current account deficits, high inflation, weak infrastructure and coalition politics are negatives that India requires to overcome to face the challenges the world is throwing at the country.

In a fast changing world, where does one invest? The wrong investments can set one back by many years. It is critical to analyze the expected changes that can take place in the world over the next five years and then make sound investment decisions to capitalize on those changes.

Investors are Idiots.com is adopting the year 2018 as its focal point from here on. We will analyze economic, business and political trends and then identify the

http://investorsareidiots.com/2013/02/asian-crisis-has-hit-india-fifteen-years-hence/


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outperformers, be it single stocks, indices and asset classes of bonds, equities, currencies, commodities and real estate. You will benefit from our analysis and you will be able to make sound investment decisions based on our reports.

Welcome to 2018!


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Weekly Equity Market Analysis

The weekly equity market analysis brings you the outlook for broad equity indices and currencies. You will know all that has happened in the past week in equity, derivative and currency markets and will also get to know the factors affecting markets going forward.


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WEEK ENDED 1ST FEBRUARY 2013

US markets can drive global equities higher

US equities welcomed an employment report that showed that the economy added jobs at a healthy pace in the last three months. The economy added 157,000 jobs in January 2013, 196,000 jobs in December 2012 and 247,000 jobs in November 2012 with the figures for December and November being upwardly revised. The unemployment rate rose to 7.9% in January from 7.8% seen in December.

The Dow Jones Industrial Average closed at its highest levels since October 2007 after it gained by over 1% post the jobs reports. US markets are seeing steady rise in employment and the US Federal Reserve is expected to keep buying bonds and keep interest rates at record lows until the unemployment rate drops by a minimum of a percentage point.

Strong market sentiments in the largest economy in the world will have knock on effects on equities across the globe. The Sensex and Nifty too will benefit from strong US markets though there are near term issues for equities in India. Worries of banks being forced to make higher provisions for doubtful debts are hitting sentiments on leveraged sectors such as real estate. Banks may go slowly on credit as they make higher provisions for bad debts.

The INR gained week on week on the back of a stronger Euro and weaker Yen. The rise in INR is due to higher risk appetite in the market on the back of improving economic conditions and on the back of loose central bank liquidity. Manufacturing data for the month of January 2013 came in positive for China and the Eurozone indicating that these economies may be bottoming out. INR is likely to trend higher in the coming weeks as equity sentiment improves globally.


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Table 1. Weekly market movement


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Select gainers and losers in BSE 500 last week.

Suzlon Energy gained this week on the back of strong order inflows. The world’s fifth largest wind turbine supplier announced on Thursday on winning an order for 350MW wind farm in Canada, which followed by news on Friday that the company has secured order for 138 MW wind farm in South Africa.

Pidilite Industries rose on the back of strong Q3 Results. The company has posted a 51% growth in consolidated net profit.

Adani Ports gained on the news that APSEZ board has approved a proposal to sell most of the stake in its Abbott Point Terminal in Australia to the Adani family. The move would reduce a debt of Rs 11,000 crore from APSEZ’s balance sheet, and improve profitability of the firm by reducing the firm’s interest costs.

Sun TV rose on strong Q3 Result. The company has posted a 13.17% growth in net profit.

http://investorsareidiots.com/2013/02/weekly-equity-market-analysis-week-ended-1st-february-2013/g-6/


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Hexaware Technologies Ltd has clarified with reference to the baseless and malicious rumors pertaining to the company losing one of its large clients. The company has denied that it is false and mischievous. It has confirmed that it has not lost any client nor has it encountered any adverse outcomes in the recent deal pursuits.

Allahabad Bank is down due to poor Q3 Result, in which the bank posted a decline of 44.5% on its net profit.

Bharti Airtel reported poor Q3 result for 12th straight quarter. In the quarter company’s net profit declined by 72%.

http://investorsareidiots.com/2013/02/weekly-equity-market-analysis-week-ended-1st-february-2013/l-7/


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WEEK ENDED 8TH FEBRUARY 2013

Equity markets digesting higher levels

Equity indices in India fell across the board on profit taking at higher levels. The weak GDP growth estimate report released by the CSO (Central Statistical Office) hurt equities and the Rupee though it helped bonds (Read weekly). The mixed nature of the third quarter 2012-13 corporate results that saw few companies showing good growth and few showing weak to no growth weighed on the markets mind. Derivative markets saw implied volatility in Nifty index put options rising by 2% week on week implying hedging at higher levels of the market.

China’s exports for January 2013 rose 25% on a year on year basis partly due to better demand for Chinese exports and partly due to statistical effect of new year holidays falling in January last year. However the rise in exports was more than expected leading to improved sentiments on the prospects for the Chinese economy.

The EU (European Union) leaders met last week to finalize the EU budget for 2013. The budget showed spending cuts and it remains to be seen how the EU region is to grow without a fiscal push. The ECB (European Central Bank) held rates last week but showed worries on the economy’s growth. ECB also talked about a stronger Euro that has climbed by over 4% against the USD over the last few months. The Euro fell on the back of the ECB meet.

The INR fell last week as the Euro fell from highs. Weak GDP growth estimates for India also weighed on the INR. The INR is likely to trade in a narrow range given pulls and pushes from various quarters.


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Essar Oil rose on positive outlook for refining margins Suzlon gained on fresh orders for wind turbines.

Strides Arcolab fell on asset sale reports. Sterlite Industries declined on Q3 Result as it had posted a 21% growth in

PAT, which was below the street expectation. Street was expecting a 41% growth in PAT.

Indiabulls Financial shares fall on block deals.




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JP Associates raised Rs 530 cr via QIP. The stock fell after the deferral of the offer-for-sale of Jaypee Infratech.

Opto circuit declined on mounting corporate governance issues


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Markets consolidating for the next move

The Sensex and Nifty closed down marginally last week as the markets digested weak IIP numbers, better than expected inflation numbers and mixed global economic data. Weak corporate results including that of Tata Steel, Tata Motors, Hindalco and SBI worried the market leading to nervous trading. Implied volatility in Nifty index put options moved higher as players hedged positions at higher levels. Nifty Index futures open interest rose by over 9% week on week on the back of positioning for the budget.

IIP growth from December 2012 came in at a negative 0.6% taking the April – December 2012 growth to an anemic 0.7%. Inflation as measured by the WPI (Wholesale Price Index) fell to 6.62% in January 2013 against levels of 7.18% seen in December 2012. CPI (Consumer Price Inflation) stayed above 10% for January 2013 on the back of high food prices. Trade deficit rose 15.5% month on month in January 2013 though exports managed to show marginal growth.

The INR weakened against the USD on the back of the Euro coming off and on the back of higher trade deficit. The Euro fell by 0.3% against the USD post the release of the negative 0.6% fourth quarter GDP growth number for the Eurozone. Japan saw the third quarter 2012 GDP growth number coming in negative. US saw better data with improved consumer sentiments and lower trade deficit for January 2013. Positive US economic data helped the USD gain against the majors.

Equity markets are consolidating for the next move and that is likely to be higher. An economy friendly budget will push the markets higher in March as rate cut expectations are high in the RBI March policy review.


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Pidilite Industries moved up by close to 10% on the back of robust Q3 results. The company reported a 51% year-on-year (y-o-y) jump in its consolidated net profit.

Emami Ltd revealed plans of increasing prices of some of its products by 4-5 per cent. In addition to this, the company said that it anticipates a positive scenario on the sales and profit front for the January-March quarter of 2013. The growth on these fronts could touch 16-18 per cent mark.

Tata Motors gained 6%, after the company’s UK subsidiary Jaguar Land Rover (JLR) reported a strong 32% year-on-year (y-o-y) growth in global sales in the month of January 2013.




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Suzlon Energy lost around 19% due to the poor Q3FY13 result. The company has reported its biggest quarterly loss.

Unitech declined on fresh 2G scam probe. Opto Circuits fell after the company reported 9.45% decline in consolidate

net profit for Q3FY13.


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WEEK ENDED 22ND FEBRUARY 2013

US sequester and India government borrowing to drive markets

US economy is facing USD 85 billion of budget cuts; also known as the “Sequester” starting 1st of March 2013. The budget cuts will affect many government programs and services and markets are worried about the effect of these cuts on the US economy. US policy markets are yet to figure out a way to avoid these cuts leading to volatility in equity and currency markets.

Equities and currencies were also impacted by the release of the minutes of the January 2013 US Federal Reserve (Fed) open market committee meeting. The Fed members showed worry on the Fed’s bond purchase program and spoke about withdrawing the stimulus even before labor markets fully stabilizes. Equities fell and the US dollar strengthened post the release of the minutes.

The Sensex and Nifty closed lower week on week on the back of volatility in global markets. Derivatives markets saw increased hedging activity ahead of the budget day on the 28thof February. Nifty index option implied volatility rose week on week on the back of the hedging activity. The Sensex and Nifty will consolidate at lower levels before trending higher if the government unveils a lower borrowing program for fiscal 2013-14. (Read Budget 2013-14 Reality Show Part 4- Cheat Sheet for Budget Presentation)

The Indian Rupee (INR) closed up week on week despite a broad USD strength. The INR will take its cue from the budget rather than from the USD movement against majors.

The Euro fell close to one percent last week on the back of the Fed’s minutes release and on the back of weak fourth quarter 2012 Eurozone GDP growth

http://investorsareidiots.com/2013/02/budget-2013-14-reality-show-part-4-cheat-sheet-for-budget-presentation/



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numbers. The Eurozone GDP contracted by 0.6% in the fourth quarter of 2012 and forecasts for 2013 and 2014 are not positive. The downgrade of UK’s AAA rating due to growth concerns on the economy will also lend strength to the USD.




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McLeod Russel and Berger paints gained on the back of strong Q3FY13 results.

DLF rose as the vice chairman of the company Rajiv Singh indicated that earnings would improve and net debt would fall.

Eicher Motors’ business division, Royal Enfield in a bid to strengthen its position in the niche bike market planned to ramp-up its production capacity beyond 150,000 units per annum by 2014.The company is presently setting up a new plant near Chennai at an investment of Rs 150 crore and with the help of this, the company will have a total combined capacity of 150,000 units.




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Opto Circuits lost due to poor Q3FY13 results. Reuters reported that the government may further raise import duties on

gold or put a cap on purchases in a bid to rein in the current account deficit in the 2013 to 2014 budget and this news impacted MMTC.

LIC Housing Finance’s performance in the December quarter was disappointing. The housing finance company posted a 23% year-on-year decline in its net profits due to higher provisioning driven by poor asset quality.

Jet Airways fell after the Abu Dhabi-based Etihad Airways put a host of new conditions on acquiring a stake in the company.


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Weekly Fixed Income Market Analysis

The weekly fixed income markets analysis was carried in DNA Money, every Monday until the 5th of November 2012 and is the longest running fixed income column in the country. The column was first published in November 2005 and has been running continuously since then.

The weekly fixed income markets analysis brings you the outlook for interest rates and credit spreads. You will know all there is to know on the factors affecting the fixed income market. .

http://www.dnaindia.com/money


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Jump in CD yields indicate tight liquidity conditions ahead

The 25bps CRR (Cash Reserve Ratio) cut by the RBI in its policy review on the 29th of January has failed to improve market sentiments on liquidity. The CRR cut released Rs 18,000 crores of liquidity into the system but money markets are jittery on liquidity conditions going into the end of fiscal 2012-13.

The nervousness of markets on liquidity was felt most acutely in yields of bank CDs (Certificate of Deposits). One year maturity CD yields rose by 40bps week on week to close at levels of 9.10%. The sharp rise in CD yields despite a 25bps repo rate and 25bps CRR cut by the RBI is a reflection of expected liquidity situation in March 2013.

The daily market borrowing under the LAF (Liquidity Adjustment Facility) window of the RBI averaged Rs 104,000 crores on a daily basis last week against an average of Rs 97,000 crores seen in the week before last. The month of February will see the government borrowing Rs 48,000 crores from the market to complete its scheduled borrowing program for the fiscal year. State governments are expected to borrow around Rs 20,000 crores in February. Central government and state government borrowing is likely to place further pressure on liquidity as government spending slows down.


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The central government is keeping excess funds with the RBI leading to liquidity being sucked out of the system. Deposits of the central government stood at Rs 40,000 crores as of 25th January 2013. State governments too are placing excess funds in 14 day treasury bills with amount outstanding of Rs 105,000 crores. Lack of spending by central and state governments coupled with market borrowings will lead to further drain on system liquidity.

The markets are also worried about the USD 13.5 billion of outstanding forward USD/INR contracts of the RBI (as of November 2012). The maturity of these forward contracts is a liquidity drain from the system and if part of these contracts matures in the next two months, liquidity will be further pressured.

The slow growth in deposits and rising credit growth is hitting liquidity hard. The October 2012 –January 2013 period has seen credit and deposits grow by Rs 233,000 crores and Rs 127,000 crores respectively leading to banks drawing

http://investorsareidiots.com/2013/02/weekly-fixed-income-market-analysis-week-ended-1st-february-2013/screen-shot-2013-02-02-at-2-18-11-pm/


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down on liquidity to fund credit growth. The continuation of this trend in the next two months will lead to sharp shortfall in liquidity in the system.

Advance tax outflows will also hit the system in mid March and that will also be a big drain on system liquidity. Banks that are in need of liquidity will have to pay higher rates for funds. CD yields are likely to trend higher in the coming days as banks rush to mop up whatever liquidity that is available in the system.

Banks will raise deposit rates in the short maturity bucket to draw bulk deposits. However as corporate get lured into higher deposit rates, they will withdraw money from mutual funds that in turn will be forced to sell money market instruments to fund the redemptions. This cycle will push up yields of money market instruments such as CD’s and CP’s (Commercial Papers). The sharp rise in CD yields last week is an indicator of further yield spikes ahead.

Government bond yields rose week on week as markets braced itself for government bond supply amidst tight liquidity conditions. The ten year benchmark bond the 8.15% 2022 bond saw yields rise by 2bps week on week to close at 7.90% levels. Bond market will expect RBI to conduct OMOs (Open Market Operations) to infuse liquidity into the system and that will keep bond yields soft going forward.

Corporate bond yields rose week on week on the back of liquidity worries. Five and ten year corporate bond yields rose by 5bps and 7bps respectively. Corporate bond yields are likely to be pressured on the back of tightening liquidity.

OIS (Overnight Index Swaps) markets saw one and five year OIS yields rising by 8bps and 13bps respectively week on week. OIS markets saw paying on the back of liquidity worries and on a non-committal RBI on more rate cuts. Five year OIS yields are also being affected by rising US treasury yields with the ten year US treasury rising by 30bps over the last few months. Five year OIS yields are likely


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to rise further as markets factor in the negatives of liquidity, no rate cuts and higher US treasury yields.

Government bond auctions

The government auctioned Rs 12,000 crores of bonds last week. The bonds auctioned were the 8.12% 2020 bond for Rs 3000 crores, the 8.20% 2025 bond for Rs 6000 crores and the 8.30% 2042 bond for Rs 3000 crores. The cut off came in at 7.92%, 8.02% and 8.13% respectively. The government is scheduled to auction Rs 12,000 crores of bonds this week and state governments are auctioning Rs 7670 crores of state development loans (SDL).

http://investorsareidiots.com/2013/02/weekly-fixed-income-market-analysis-week-ended-1st-february-2013/fi-16/


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Weak GDP estimates spur fresh bond buying

The weaker than expected GDP growth forecast for 2012-13 that was released by the CSO (Central Statistical Office) had bond traders building fresh long positions. The bond buying by traders helped bond yields come off from one month highs. Bond markets will now start betting on a repo rate cut in the March 2013 mid quarter policy review of the RBI. The ten year benchmark bond the 8.15% 2022 bond saw yields close at 7.85% down 8bps from highs of 7.93% seen during the week. The bond is likely to see yields trend down further on rate cut expectations.

The CSO released an estimate of 5% GDP growth for fiscal 2012-13. The CSO’s estimate was based on data available till November 2012. The 5% GDP growth estimate is well below the 5.5% and 5.7% growth estimate of the RBI and the government. The GDP growth for 2011-12 was revised downwards from 6.5% to 6.2%. The sharp fall in GDP growth estimates can lead to repo rate cut by the RBI in March as inflation is expected to trend down in the January-March 2013 period. Inflation as measured by the WPI (Wholesale Price Index) is expected to trend below 7% levels from December 2012 levels of 7.18%.

The bullish sentiments of the bond markets post the GDP growth estimate release was seen in the heavy demand in the government bond auction. The government auctioned Rs 12,000 crores of bonds on the 8th of February 2013 and the bids for the auction totaled Rs 42,900 crores implying a bid to cover ratio of 3.57x. The auctioned bonds saw yields trading around 2bps below cut off yields indicating strong auction demand.


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Liquidity as measured by bids for repo in the LAF (Liquidity Adjustment Facility) auction of the RBI eased last week. Bids for repo averaged Rs 82,600 crores on a daily average basis last week against an average of Rs 104,000 crores seen in the week previous to last. Release of Rs 18,000 crores from the CRR (Cash Reserve Ratio) cut coupled with government spending for salaries helped ease liquidity. Liquidity is likely to tighten in the coming weeks on the back of year end demand for funds by banks.

Corporate bonds saw yields come off on the back of falling government bond yields. Five and ten year benchmark AAA corporate bond yields closed down by 8bps and 2bps week on week respectively to close at levels of 8.72% and 8.78%. Credit spreads closed mixed with five year credit spreads closing lower by 1bps at 75bps levels and ten year credit spreads rising by 4bps to close at 78bps levels.



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Corporate bond yields are likely to trend down in the five year and above segment of the curve on rate cut expectations.

OIS (Overnight Index Swaps) market saw the curve shift down marginally with one and five year OIS yields coming off by 2bps and 4bps week on week respectively. OIS yields are likely to trend down further on rate cut expectations.


The government auctioned Rs 12,000 crores of bonds last week. The bonds auctioned were the 8.07% 2013 bond for Rs 3000 crores, the 8.15% 2022 bond for Rs 6000 crores and the 8.97% 2030 bond for Rs 3000 crores. The cut offs came in at 7.87%, 7.87% and 8.05% respectively. The government is scheduled to auction Rs 12,000 crores of bonds this week.



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Market to position for March rate cuts post budget

Bond markets will seriously position for rate cuts post the budget for 2013-14 that is to be tabled in the parliament on the 28thof February (Click here to read pre budget analysis). The market will watch out for the government borrowing program for fiscal 2013-14. The market is expecting a slightly higher borrowing next year against the Rs 579,000 crores gross borrowing for 2012-13. The government on the other hand is indicating that it is likely to show a lower borrowing amount on the back of the cash surplus it is carrying into the coming fiscal. (Read Economic Analysis February 2013-Lower government borrowing for fiscal 2013-14 is positive for the economy)

The rate cut expectation in the RBI policy in March is driven by weak IIP growth and falling inflation numbers. IIP (Index of Industrial Production) growth for December 2012 came in at a negative 0.6% taking the growth for the April-December period to a negligible 0.7% against a growth of 3.7% seen in the previous year.

http://investorsareidiots.com/home/union-budget-2012-13/

http://investorsareidiots.com/home/union-budget-2012-13/

http://investorsareidiots.com/2013/02/economic-analysis-february-2013/

http://investorsareidiots.com/2013/02/economic-analysis-february-2013/


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Inflation as measured by the WPI (Wholesale Price Index) printed at 6.62% for the month of January 2013. Inflation stood at 7.18% in December 2012. RBI has forecast an inflation number of 6.5% for the month of March 2013. Manufacturing inflation fell to its lowest levels in over a year to 4.81% underlying the weak demand trend in the economy.

The bond purchases by the RBI to shore up fiscal year end liquidity tightness are positive for the markets. RBI bought Rs 9997 crores in an OMO (Open Market Operation) bond purchase auction held last week. RBI is expected to hold more OMOs in the next few weeks to shore up system liquidity. RBI has bought around Rs 150,000 crores of bonds in fiscal 2012-13 and more bond purchases will keep the market light on bonds as it goes into fiscal 2013-14.

Liquidity as measured by bids for repo in the LAF (Liquidity Adjustment Facility) auction of the RBI tightened last week. Bids for repo averaged Rs 120,000 crores on a daily average basis last week against an average of Rs 82,600 crores seen in the week previous to last. Government cash balances with the RBI coupled with year end demand for liquidity by the system is placing pressure on liquidity.



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Government bond yields fell marginally week on week with the benchmark ten year bond, the 8.15% 2022 bond seeing yields fall by 2bps. Bond markets chose to focus on the budget rather than react to bond yield positive IIP and inflation numbers.

Corporate bonds saw yields trade flat on worries of liquidity. Five and ten year benchmark AAA bonds yields closed unchanged at levels of 8.72% and 8.78% respectively. Corporate bond yields will stay sticky at current levels in the next couple of weeks due to tight liquidity conditions.

OIS (Overnight Index Swaps) markets saw the curve close almost unchanged last week. OIS markets will wait for the budget before making the next move. One year OIS yields will fall sharply post budget on rate cut expectations.


The government auctioned Rs 12,000 crores of bonds last week. The bonds auctioned were the 8.12% 2020 bond for Rs 3000 crores, the 8.20% 2025 bond for Rs 6000 crores and the 8.30% 2042 bond for Rs 3000 crores. The cut offs came in at 7.86%, 7.91% and 8.02% respectively. The government is scheduled to auction Rs 12,000 crores of bonds this week and this auction will be the last auction for this fiscal.


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Bond market eyeing government borrowing for fiscal 2013-14

The bond market will take direction from the government borrowing numbers for fiscal 2013-14. The FM will release the gross and net government borrowing numbers for fiscal 2013-14 in the budget presentation on the 28thof February 2013. Bond markets are expecting the government to show a lower net and/or gross borrowing for fiscal 2013-14 than the amount borrowed in this fiscal. Investors are Idiots.com has estimated the borrowing for fiscal 2013-14. (Read Budget 2013-14 Reality Show Part 4- Cheat Sheet for Budget Presentation).

The government cancelled the last bond auction scheduled for this fiscal as it had enough surplus funds and did not want to cause further strain on liquidity. The cancelation of the Rs 12,000 crores bond auction has lowered the total borrowing numbers for this fiscal. The government has borrowed a gross amount of Rs 557,000 crores and a net amount of Rs 467,000 crores in fiscal 2012-13.

The cancellation of the government bond auction helped bring down government bond yields with the benchmark ten year bond yields falling by 4bps week on week. The 8.15% 2022 government bond closed at 7.79% levels last week and the yield on the bond will trend down further if the government shows a market positive borrowing program for the coming fiscal.




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Liquidity conditions tightened week on week despite inflow of Rs 10,000 crores from RBI bond purchases and despite the cancellation of the government bond auction of Rs 12,000 crores. Liquidity as measured by bids for repo in the LAF (Liquidity Adjustment Facility) auction of the RBI tightened by Rs 7000 crores week on week with bids for repo averaging Rs 127,000 crores on a daily basis last week against an average of Rs 120,000 crores seen in the week before last. Liquidity tightened on the back of fiscal year end demand for funds by the banking system and on the back of rising cash balances of the government.

Government cash balances are speculated to have gone up to Rs 100,000 crores as of last week. The rising cash balance of the government is sucking out liquidity from the system at a time of advance tax outflows in mid March. Advance tax outflows coupled with high government cash balances and fiscal year end demand for funds will push up liquidity deficit closer to Rs 200,000 crores.

Money market securities bore the brunt of expected liquidity tightness. One year CD (Certificate of Deposit) yields rose by 25bps week on week to close at 9.40% levels as markets demanded higher liquidity premium to lend to banks. One year



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CD yields have gone up by around 90bps over the last two months on the back of liquidity issues. CD yields will be pressured until mid March after which yields will start dropping as markets position for lower rates in April 2013.

Corporate bond yields rose week on week on the back of liquidity worries. Five and ten year benchmark AAA corporate bond yields rose around 10bps each and yields closed at 8.82% and 8.80% respectively. Five and ten year credit spreads rose by 13bps and 6bps respectively to close at 86bps levels. Credit spreads will stay pressured until mid March on expectations of tight liquidity conditions.

OIS (Overnight Index Swaps) yields closed almost unchanged week on week as liquidity pressures kept the curve flat despite government bond yields coming off. Five year OIS yield is likely to come off faster than one year OIS yield in the near term if the government borrowing number is market positive



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Weekly Podcast Transcript

The Friday podcast is a value adds feature for the followers of Investors are Idiots.com. The brief podcast will select one topic for analysis and will be released every Friday.


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“Do not be too adventurous in this market”

The outlook for equities may be positive due to various reasons including central bank liquidity, bottoming out of global growth, lower interest rate regime in the country and selective reforms by the government. The Sensex at 20,000 levels is at over two year highs and is expected to rise going forward. However even if you are positive on the market you should not be too adventurous in your stock selection.

The recent fall in stocks such as HDIL and Opto Circuits that fell 37% and 22% week on week as of week ended 25th January 2013 is a strong reminder of the issues plaguing some companies. HDIL promoters sold their stake to fund land purchase and markets took it as of sign of the company finding it difficult to service its heavy debt. Opto Circuits is facing corporate governance issues leading to investors exiting the stock.

There are many stocks such as HDIL and Opto Circuits in the market and a positive market outlook is ripe for speculators or even promoters to ramp up stock prices to exit. Unsuspecting investors will be left holding worthless paper if they are not careful.

The Indian economy is undergoing changes and past excesses have brought about these changes. Many sectors are facing issues of debt, lack of demand and policy constraints. Such sectors include Real Estate, Infrastructure and Telecom. The auto sector in India is facing demand slowdown with the industry body expecting almost zero per cent growth for this fiscal. The weak INR, that is down over 20% over the last two years have impacted companies that have USD denominated debt. The problems faced by these sectors and companies will not go away soon even if equity markets are trending up.


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It is a time to be careful on the stocks that you choose to buy. In fact you should be over cautious on stocks given the uncertainty surrounding many sectors and stocks. It is a time to look first at balance sheet strength, then at valuations and then at growth. You should not mind short term underperformance for long term gains. More importantly you would want to have peace of mind with your stock portfolio rather than worrying about what adverse news that could hit your stock.


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“How land speculation leads to inflation and current account deficit”

Land that is not used for productive purposes but is treated as a speculative assets class has a direct impact on the economy. The impact of land speculation is clearly negative as it pushes up inflation and leads to rising current account deficit. India has been suffering from high inflation that has been running well above RBI’s comfort zone of 5% and below for over three years in the running. India’s current account deficit (CAD) has seen record highs of 5.4% of GDP in the second quarter of fiscal 2012-13.

How does the land speculation lead to rising inflation and rising current account deficit? Let us take an example of an agricultural land that was growing crops. The produce of the land added to the food supply in the economy leading to a reasonable demand supply balance.

The speculator now comes into the picture and pays off the farmer owning the land. The farmer receives a sum of cash for selling the land. The speculator does nothing with the land except to hold it and sell it at higher prices to the next speculator.

The farmer has cash to spend but the economy has less food supply, as the agricultural land is now not producing any crops. The farmer when he is spending the money is creating demand for products including food. However the supply to meet the farmers demand has not gone up, as land is not producing anything whether it is food crops or manufactured goods. The demand from the farmer who sold the land is now creating inflation in the economy.


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The high prices of goods in the country now attract foreign exporters who look to sell goods at higher prices. The influx of foreign goods in the economy leads to rising imports, which is not matched through commensurate exports leading to a high trade balance. The high trade balance leads to a rising CAD if other receipts do not match the trade deficit.

The agricultural land example is one example of how land speculation leads to higher demand for goods without commensurate supply leading to inflation and CAD. The same example applies to land that was used for manufacturing with manufacturing being stopped for constructing townships and houses that do not see end users living in them.

Land that has not been used for any production but is used for speculation also has an inflationary impact on the economy. In this case the landowner receives money for doing nothing and he now creates demand in the economy.

The more the speculation on land the more the inflation and the higher the CAD.


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“Budget 2013-14 musings”

The Union Budget for 2013-14 is to be tabled in the Parliament on the 28th of February 2013. This budget will be the last full budget of the UPA government before elections in 2014. The Finance Minister Mr. P. Chidambaram will present the budget on the 28th of February.

Investors are Idiots.com will be presenting a series of analysis on the budget for 2013-14 and this will culminate in the analysis of the actual budget that will be tabled in the Parliament on the 28th of February.

This podcast will be the first of the budget 2013-14 series from Investors are Idiots.com.

What can the FM do in this budget or any other budget for the matter? Budget numbers are consistently off target both on the higher side and on the lower side. Last year’s budget was off the mark by a wide margin on GDP growth for 2012-13. The budget estimate for GDP growth was 7.6% and the actual number is expected at around 5.5%. The estimate for CAD (Current Account Deficit) was 3.6% of GDP and the actual CAD is expected at around 4.6% of GDP. The estimate for Fiscal Deficit was 5.1% of GDP and the actual figure is expected at 5.3% of GDP. The government surprisingly got the inflation number right at 6.5% and inflation is expected at around 6.5% for March 2013.

The government is like a listed corporate looking to increase shareholder value. A corporate when it throws out bad numbers will say the future looks bright and when it throws out good numbers will say the future looks brighter. It is up to the analysts and investors to forecast the future of the corporate.


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The same is the case with the government. The government will say growth is a priority, inflation management is a priority, deficits are a priority, FII’s are a priority, industry and agriculture are a priority and voters are a priority. Ultimately the government is interested in the voter and it will do whatever it believes is right to get the voter to vote for the government in the elections.

The government will be optimistic on its forecasts for 2013-14 and it is left to us to analyze whether the forecasts will be better than budgeted or worse than budgeted. At the end of the day, what makes returns on your investments is how your forecast turns out and not how the government’s forecast turns out.


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“Why is gold price falling?”

Gold price has fallen 17% from highs seen in August 2011 and 9% over the last one year. Gold is trading at levels of USD 1574/oz at present, the lowest level in 2013. Why is the price of gold falling?

Gold prices rose to record highs of USD 1900/oz in 2011 as markets worried on issues such as the collapse of the Euro and on high inflation prevailing in many parts of the emerging world including China and India. Gold was seen as a safe haven asset in the midst of turmoil in currency markets and turmoil in economies around the world. Investors who had sold out of equities and risky bonds invested in gold to safeguard their cash.

The movement of money into gold from other assets classes drove up gold prices. Gold prices are up by 60% over the last five years. The rising gold prices enticed speculators who borrowed money and invested in gold. The leveraging in gold pushed up prices to record highs.

The fact that gold has not been able to sustain record high levels and has come off by 17% from highs is now forcing speculators to deleverage on their gold investments. Investors too are now staying away from gold as prices are trending down.

Gold lost out as a safe haven asset when the world averted the Euro crisis and when inflation fell in emerging economies. The outlook for inflation is benign on the back of oil price forecasts being lowered due to higher oil production in the US. The falling growth in economies of China and India has weakened the outlook for industrial commodities leading to further fall in inflation expectations.


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Gold fell 2% overnight on the 20th of February 2013 on the back of the Fed’s minutes that cast doubts on the continuity of the asset purchases. The Fed will have to wind down its asset purchase program at some point of time, but it is not going to be anytime soon. However gold investors are jittery having seen prices fall from peaks. The reason to hold gold as a safe haven asset is no longer strong with no real threat to financial stability and to inflation in sight.

The question is what should gold investors do now? Investors are Idiots.com has been putting out analysis on gold and the analysis has turned out right. Follow the Link between currencies, commodities and equities series for more analysis on gold.

http://investorsareidiots.com/newsletter-4/equity/


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Economic Analysis


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Published on: 15th February 2013

Economic Analysis February 2013

Indian Economy

The government funds over 90% of its fiscal deficit through issue of dated government bonds. A rising fiscal deficit implies higher government borrowing that in turn leads to pressure on interest rates. At a time when the economy is slowing down with all indicators including IIP (Index of Industrial Production) growth of 0.1% for the April-December 2012 period pointing to GDP growth slowing to decade lows, it is difficult for the government to curtail its borrowing. The primary issue countries such as Spain are facing is that the weak economy is making it impossible for the government to adhere to strict fiscal norms enforced by the EU (European Union).

India’s GDP growth estimate for 2012-13 is placed at 5% by the CSO (Central Statistical Office), based on data available up to November 2012. The government is hotly contesting the growth estimates but the fact is even a 5.8% growth is a ten year low. The slowing economy has pushed up fiscal deficit numbers to 5.3% of GDP for 2012-13 against budgeted estimates of 5.1% of GDP. However despite a higher fiscal deficit the government is not borrowing more than the budgeted amount of Rs 569,000 crores. The reason the government is not borrowing more to fund the higher fiscal deficit for this year is that it has seen an increase in small savings, which it did not budget for in its initial borrowing estimates.

The government is running a cash surplus of around Rs 80,000 crores as of February 2013 and is looking to carry forward the cash surplus into fiscal 2013-14. The cash surplus will help the government borrow less for the coming fiscal and the lower borrowing will ease pressure on markets to absorb the supply and


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also ease pressure on the RBI to buy government bonds. Government bond purchases by the central bank are inflationary in nature and inflation expectations will trend down on the back of the RBI refraining from buying government bonds.

Lower government borrowing will bring down yields on government bonds as market demand-supply dynamics turn in favor of demand. The corporate bond market will have more access to funds as lower government borrowing places less pressure on liquidity. Falling interest costs for corporate will help improve investment demand in the economy.

The government borrowing math

How does the demand and supply for government bonds stack up? Table 1 gives the demand supply maths for government bonds in India. The assumption for 2013-14 is that the government will borrow a gross amount of Rs 529,000 crores.

Table 1. Government Borrowing Maths

http://investorsareidiots.com/2013/02/fixed-income-investing-series-24-government-borrowing-and-its-impact-on-gilt-and-income-funds/screen-shot-2013-02-13-at-4-26-06-pm-2/


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The year 2012-13 saw RBI taking up 26% of the gross borrowing of the government. Banks bought Rs 180,000 crores of government bonds that constituted 23% of deposit growth of 13.5% assumed for full year 2012-13. Bank deposits had grown by 13.1% as of 25th January 2013. FII’s have bought around Rs 25,000 crores of government bonds fiscal year to date while the other including insurance companies, provident funds, mutual funds and corporate have bought a total of Rs 214,000 crores of bonds.

The lower government borrowing for the year 2013-14 could easily be absorbed by the market without RBI intervention. Banks are likely to invest 23% of their incremental deposits in government bonds assuming a deposit growth of 14.5%, which should be the target growth for the year. FII’s should utilize the full limits of USD 25 billion on the back of expectations of bond yields coming off. FII’s have unutilized limits of Rs 34,000 crores as of end January 2013. The others category is likely to see a significant jump in government bond purchases as traders and investors shore up their bond holdings on expectations of fall in interest rates

The government borrowing math shown in Table1 is dependent on RBI lowering the repo rate in fiscal 2013-14, inflation coming off in the economy and liquidity becoming comfortable in the system.

World Economy

The hope for the markets in 2013 is that the worst is over for the global economy. Data has been mixed suggesting that the turnaround is not yet fully certain. On the negative side, GDP growth data for the US showed 0.1% fall in GDP growth for the fourth quarter of 2012 while Japan’s third quarter 2012 GDP growth fell for the third straight quarter. Japan’s GDP growth for the December quarter of 2012 fell at an annualized rate of 0.4% while the country’s September quarter growth was revised to an annualized rate of -3.8%. Economists had estimated a 0.4% growth for the Japanese economy in the December quarter.


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China’s fourth quarter 2012 GDP growth at 7.9% helped the economy register a full year growth of 7.8%. China’s economic growth for 2012 is the slowest in thirteen years. Eurozone is likely to have shrunk in the fourth quarter of 2012 as economies from France to Spain suffer flat to recessionary growth due to spending cuts.

Data has been positive on other counts. Manufacturing data from China to the Eurozone has been positive for January 2013 while the US continues to see jobs being added in the economy. China’s exports grew by 25% in January 2013 while US retail sales rose for the third straight month.

The question is will data turn more positive or more negative going forward? Markets are suggesting that the worst may be over with strong gains in equities in the beginning of calendar 2013 (Read Market Analysis February 2013). It is likely that markets could be proved right as central banks continue to pump in money to shore up economies.

Table1. Key Economic Indicators

http://investorsareidiots.com/2013/02/market-movement-analysis-february-2013/

http://investorsareidiots.com/2013/02/economic-analysis-february-2013/screen-shot-2013-02-14-at-12-16-43-pm/


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.

OPINION


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Asian crisis has hit India, fifteen years hence Brace yourselves for tough times ahead

The Asian crisis that hit the Tiger economies in the late 1990’s missed India then. India was not exposed to international markets in the 1990’s and the fast growing Tiger economies of Hong Kong, Thailand, Indonesia, Philippines, South Korea and Malaysia that were exposed to global markets suffered when the bubble burst. The Asian crisis was all about countries taking up short term external debt to unsustainable proportions leading to a run on their currencies. The aftermath of the Asian crisis proved to be an extremely difficult period for Asian economies that saw them go into deep recession and it took them many years of reforms and hardship to come out of the crisis.

India is now suffering the same pain as its Asian counterparts suffered then. The scale and the reasons may differ but the pain of coming out of the issues is the same. India will have to undergo a period of restructuring in the coming years for the economy to strengthen. The restructuring period is going to be difficult for all concerned. However once the restructuring is over then the economy should get back on a more qualitative growth path.

India’s problems at present

The Indian Rupee (INR) reflects the market sentiment on the country. The INR is the worst performing currency amongst other Asian economies. Table 1 shows the performance of Asian currencies against the USD over a three year period.


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Table 1.

Source: Yahoo Finance

The INR has depreciated by close to 16% over the last three years while all other currencies except the Indonesian Rupiah have appreciated. The INR depreciation is more to do with India’s problems than market sentiments towards Asian currencies. The reasons for the INR depreciation are largely due to the rising Current Account Deficit (CAD), rising vulnerability factors and rising fiscal deficit.

Current account deficit as a percentage of GDP has gone up from levels of 2.8% in 2009-10 to levels of 5.4% seen in the second quarter of 2012-13. CAD is expected at 4.6% for the full year 2012-13. Indian’s vulnerability to the external sector has gone up with short term external debt to total external debt ratio rising from levels of 13% seen in 2005 to 23% levels seen in end September 2012. Ratio of short term debt of residual maturity of one year and less to total debt is 43.7% as of September 2012 indicating that the country could face serious problems if there is a freeze in global financial markets. Import cover that measures the foreign exchange reserves to imports has declined from 14 months in 2005 to 7 months in 2012. India saw such low import cover levels in late 1990’s when the country’s foreign exchanges reserves were at extremely low levels.

India’s fiscal deficit as a percentage of GDP has gone up from levels of 3.9% seen in 2005 to levels of 5.9% seen in 2012. Fiscal deficit for 2013 is expected at 5.3% of GDP.

http://investorsareidiots.com/2013/02/asian-crisis-has-hit-india-fifteen-years-hence/cur/


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India’s competitiveness at the global stage is being eroded due to high property prices and rising wages. An IT outsourcing company setting up shop in India will be paying seven to ten times as much for space as a company would have paid ten years back while wages would have gone up by at least five to seven times. A manufacturer will be paying higher land prices, higher wages, and higher transportation costs and will suffer power cuts, infrastructural bottlenecks, corruption and bureaucracy. In short it is expensive to outsource services or manufacturing to India.

India is facing rising inflation issues with CPI (Consumer Price Index) at 10.6% as of December 2012. The high CPI will push up wage costs further leading to further erosion of competitiveness of a country that depends on lower cost of skilled labour as opposed to other countries.

India has to set things right

India has no choice but to get down to hard economics. Deficits have to be cut, inflation has to be brought down, rampant property price speculation has to be curtailed, infrastructure has to be improved, corruption has to be brought down and bureaucracy has to be cut. These decisions are painful for the economy in the near term but in the long term it will help stabilize the economy and get it moving forward. It is a long hard grind ahead, similar to the grind Asian economies faced in the late 1990’s but it is definitely worth it.

Indian public has to brace themselves for tough conditions ahead.


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RBI should go easy on new bank licenses PSU banks are bearing the brunt of bad loans

RBI released an interesting Table in its third quarter 2012-13 monetary policy review. Table 1 show that PSU banks have been the worst performers in the NPA front and their capital adequacy has actually gone down in the June to September 2012 period. The other bad performer is the old private sector bank category that has seen slippages in its bad loans and capital adequacy.

RBI has now released draft guidelines on provisioning norms for restructured standard assets and this will hit PSU banks hard. Banks will have to make provision of 5% on restructured standard assets starting April 2013 if the draft guidelines are accepted. The current provisioning norm is 2.75% for restructured standard assets.

PSU banks have the highest ratio of restructured standard assets to gross advances with the ratio being 7.34% as of September 2012. The ratio for PSU banks stood at 6.67% as of June 2012 indicating that more assets are being structured every quarter. The ratio could go up if more real estate firms default on loans. The 37% fall in real estate firm HDIL stock price in the week before last is an indicator of market perception of debt levels of leveraged real estate companies.


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Table 1.

Source: RBI

The fact that PSU banks are seeing the worst of the bad loan problems raises many questions on the way the banks are being run. The government ownership of the banks does not lend them much credibility in terms of managing risks. Issues of crony capitalism also come into play while issues of directed lending to problem ridden state electricity boards also affect the risk management credibility of PSU banks.

The government has to appoint the right professionals to manage PSU banks and maintain arms length distance in their functioning. This move will then add credibility to the perception of PSU banks in the eyes of investors and rating agencies.

The government is trying to push RBI in giving out new banking licenses with daily media reports on what kind of corporates can be given bank licenses. The fact that the government is getting involved in new bank licenses at a time when its own banks are showing the worst performance in the banking sector leads to serious questions on the intentions of the government. RBI will only give out a few licenses based on merits but given the government involvement there will be

http://investorsareidiots.com/2013/02/rbi-should-go-easy-on-new-bank-licenses/screen-shot-2013-01-29-at-11-22-15-am/


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raised eyebrows on why certain corporate received licenses and certain corporate did not receive licenses.

RBI should hold back on bank licenses until the banking sector gets back on track with balance sheets improving. The government should lay off the RBI on the banking license issue. PSU banks are a bad enough example of the government’s involvement in the running of the banks. The economy certainly does not need fresh worries of crony capitalism when corporate are given bank licenses.


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RGESS or regress

Tax breaks will not help equity flows

The government is trying to push the RGESS (Rajiv Gandhi Equity Savings Scheme) by giving it extra tax sops. The RGESS is an equity scheme where an individual earning Rs 10 lakhs or less per annum can save 50% in tax for investments up to a maximum of Rs 50,000. The government believes that retail investors will flock to the equity markets through this scheme and help improve savings rate in financial assets.

The RGESS scheme is more R(e)GRES(S) than PROGRESS. The government by now should have realised that just by giving tax sops will not work in attracting investors to equity markets. The abject failure of mutual funds in attracting retail investors to equity markets is a clear example of retail investor’s apathy towards equity. Mutual funds retail equity assets are just around 18% to 20% of total assets and this industry is now close to fifteen years old (leaving out UTI that has been in existence for ages). The ELSS (Equity Linked Savings Scheme) funds constitute less than 4% of total mutual fund assets.

http://investorsareidiots.com/2013/02/rgess-or-regress/screen-shot-2013-02-11-at-3-51-22-pm/


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The fact that long term gains in equity do not attract any tax is enough of a tax incentive for investors to invest in equities. The RGESS is just one more scheme that offers tax sops to incentivise investors to invest in equities. Investors will not bite this tax sop unless there is a definite benefit in investing in equities. In fact if retail investors perceive that there is a definitive advantage in investing in equities then they will flock to the market, tax sops or no tax sops. Investors do not mind paying taxes as tax is paid on gains, unfortunately retail investors are nervous on whether they will see gains at all on equities given the current state of economic affairs.

It is a wonder than anyone earning Rs 10 lakhs or less will be able to save at all. Income taxes take away a minimum of 10% and a maximum of 20% of income. Consumer Price Inflation (CPI) running at 10% per annum ensures that income is worth less day by day. Sky high property prices and high loan costs ensures that if anybody has purchased property has sold more than half of his or her lifetime paying off property loans. Topping it all is rising cost of education, power, transport (all of which is not captured fully in the CPI). The cost of petty corruption that is pretty large is not all captured in the CPI.

Health care costs are a big concern for the public as they have to care not only for their own health but also for the heath of their children and their elderly parents. One health set back is enough to wipe out lifetime savings.

The government instead of the R(E)GRES(S) scheme should have a PROGRESS scheme where the incentive to invest in equities come from the attractiveness of the markets due to good economic policies of the government. The government should tell investors that it would frame policies that will help retail investors have more money to invest in equity markets. Such policies would mean reducing inflation, improving infrastructure, lowering wastage of scare resources that gets wasted through subsidies, curbing real estate speculation, keeping down cost of education and improving health care benefits.


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The government is really wasting its time on the RGESS. The time spent of RGESS could well go into better governance and that will automatically create the right atmosphere for equity investments. There is nothing that attracts investors more than the expectations of strong returns in a transparent asset class that is equities.

It is high time that the government stops all sorts of tax schemes for investments and instead just focus on the right policies for growth. Investments will happen automatically on the back of the latter.


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Classroom


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TUTORIALS ON EQUITY INVESTMENTS TUTORIAL 39 EQUITY RESEARCH ANALYSIS PART 16

Equity research analysis of Tata Motors - Tata Motors Consolidated Cash Flow Ratio analysis

TUTORIAL 40 EQUITY RESEARCH ANALYSIS PART 17

Equity research analysis of Tata Motors - Buy or Sell Tata Motors at Rs 293

SELECTING STOCKS FOR THE FUTURE Third Quarter 2012-13 Results Update of Recommended Stocks Stocks for 2018 Issue 1

TUTORIALS ON FIXED INCOME INVESTMENTS PART 2.7 - HEDGING INTEREST RATE RISK IN CORPORATE BONDS Part 2.8 - Introduction to CDS

FIXED INCOME INVESTING SERIES Series 24- Government borrowing and its impact on Gilt and Income

Funds

http://investorsareidiots.com/2013/02/equity-investments-tutorial-39-equity-research-analysis-part-16/



http://investorsareidiots.com/2013/02/selecting-stocks-for-the-future-series-q3-fy13-results-update/

http://investorsareidiots.com/2013/02/selecting-stocks-for-the-future-series-stocks-for-2018-issue-1/

http://investorsareidiots.com/2013/02/tutorials-on-fixed-income-investments-part-2-7-hedging-interest-rate-risk-in-corporate-bonds/

http://investorsareidiots.com/2013/02/tutorials-on-fixed-income-investments-part-2-8-introduction-to-cds/

http://investorsareidiots.com/2013/02/fixed-income-investing-series-24-government-borrowing-and-its-impact-on-gilt-and-income-funds/

http://investorsareidiots.com/2013/02/fixed-income-investing-series-24-government-borrowing-and-its-impact-on-gilt-and-income-funds/


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LEARN TO BE YOUR OWN FUND MANAGER

Series 21 – Portfolio performance based on ICICI Bank weight in your portfolio

Series 22 – Portfolio performance based on IT sector’s weight in your portfolio

RAVI SERIES ON PERSONAL FINANCE Series 19- Long term is not actually long term

MUTUAL FUND SERIES Part 6 - Analyzing Franklin Templeton Mutual Fund Equity Schemes

UPGRADING YOUR TRADING SKILLS Series 4- Managing long trading positions

http://investorsareidiots.com/2013/02/learn-to-be-your-own-fund-manager-series-21-portfolio-performance-based-on-icici-bank-weight-in-your-portfolio/

http://investorsareidiots.com/2013/02/learn-to-be-your-own-fund-manager-series-21-portfolio-performance-based-on-icici-bank-weight-in-your-portfolio/

http://investorsareidiots.com/2013/02/learn-to-be-your-own-fund-manager-series-22-portfolio-performance-based-on-it-sectors-weight-in-your-portfolio/

http://investorsareidiots.com/2013/02/learn-to-be-your-own-fund-manager-series-22-portfolio-performance-based-on-it-sectors-weight-in-your-portfolio/

http://investorsareidiots.com/2013/02/long-term-is-not-actually-long-term-ravi-series-19/

http://investorsareidiots.com/2013/02/mutual-fund-series-part-6-analyzing-franklin-templeton-mutual-fund-equity-schemes/

http://investorsareidiots.com/2013/02/upgrading-your-trading-skills-series-4-managing-long-trading-positions/


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Market movement analysis February 2013

What does the Euro trend reversal imply?

The Euro is trading at thirteen month highs against the USD as of 31st January 2013. The single currency shared by seventeen nations in the Euro Zone has gained over 12% from lows seen in July 2012 and is up over 2% month on month as of 31st January 2013. The Euro is currently trading at levels of EUR 1.357 to the USD, up from lows of EUR 1.207 seen in July 2012. Will the Euro continue to strengthen against the USD or will it see a reversal as the Eurozone economy falters in relation to the US economy? What does a rising Euro mean for the Sensex, Nifty and INR?

The rise in the Euro has been accompanied by a sustained rise in the Sensex and Nifty (Chart 1) that has returned over 18% each since July 2012. The INR too has strengthened by 4.7% since July. One primary reason for the rise in the Euro is the heavy bets that were placed on the Euro weakening as the Eurozone sovereign debt crisis threatened to erupt in 2012. The fact that the crisis was averted by actions of multiple institutions participating in defusing the crisis including the ECB (European central Bank) prompted a large scale unwinding of Euro shorts leading to the sharp uptick in the Euro.


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The Eurozone debt crisis was also threatening to pull down equities with money managers being short in equities in conjunction with the Euro shorts. The aversion of the crisis resulted in large scale short covering in equities across the globe with the German DAX being the best performer since July 2012 with a 22% gain. The Sensex and Nifty too benefitted from the Euro led short covering.

The question to ask is whether the Euro is reflecting improved Eurozone fundamentals or whether it is just short covering? Eurozone fundamentals are weak with unemployment at record highs of 11.8% as of November 2012 and the Eurozone economy contracting by 0.1% in the third quarter of 2012. Forecasts for the Eurozone are not optimistic with the economy expected to just about stay above waters in 2013. Bailout countries including Greece, Spain and Portugal are struggling to keep their economies afloat due to the stringent terms of the bailout. Eurozone fundamentals do not suggest a large scale move towards the Euro even though the economy is said to have seen the worst.

The US economy contacted by an annualized 0.1% in the fourth quarter of 2012, well below expectations. The GDP growth number came as a surprise to the market as all US data from housing to labour were pointing to an improving



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economy. US are forecast to grow at around 3% in 2013 by the rating agency Standard and Poor’s, up from earlier forecast of 1.8%. US grew at 2.2% in 2012 outstripping Eurozone growth.

The weak fourth quarter GDP growth number in the US has the markets now expecting the US Federal Reserve (Fed) to continue its USD 85 billion per month of bond buying program. The Fed’s policy rates are at close to zero per cent against the ECB policy rate of 0.75% and the Fed is expected to maintain low rates well into 2014. The Fed policies are seen as Euro positive.

Euro will stabilize and that will be positive for Sensex, Nifty and INR

The Euro will have seen most of the risk aversion out of its price at levels of EUR 1.35 to the USD. Going forward, the Euro is most likely to top out at current levels (plus 3% rise) as growth differentials between Eurozone and US will stay high. However it is unlikely that markets will risk fear trades on the Euro as the worries on the Eurozone debt crisis ebbs away.

A fear free Euro is positive for the Sensex, Nifty and the INR as global investors increase risk appetite on the back of the Fed maintaining easy monetary policy to pull up the US economy.


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TABLE: MARKETS MOVEMENTS

http://investorsareidiots.com/2013/02/market-movement-analysis-february-2013/mkt-7/


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