NIFTY EPS vs P/E

04-May-11 1 Comment

Played around some more with the market data. The chart below plots the locus of the NIFTY (solid, curvy red line) across the various EPS’ that it has had on the first day of each quarter since 1Apr2008 superimposed between a band of P/Es ranging from 12 to 26. The NIFTY has flirted with both these P/E envelopes at least once since 1Apr2008. Cycloidal? We are around 260 now. If it is cycloidal then it must droop. Which means the markets must fall. Am I crazy or are the markets crazier? :)

Filed under Market Trends Tagged with , ,

When to Sell – Part One

28-Sep-10 Leave a comment

I’ve been spending some time digging around in my trade journal and trying to understand this. Getting a handle of this very important aspect of investing is one of my birthday resolutions. This study and therefore these series of posts are a set of steps in that direction. I’ve entered into 337 sell transactions till date. The first time I ever booked a profit on a secondary market trade was way back in 05Oct’01 and the latest one was as near as 06Sep’10. To understand more about the when of my selling behaviour I looked at these 337 in conjunction with the market and it’s valuation. I also tried to plot my sales in along time to see if there were clusters of sales happening during particular time periods. I will bother (and write) about the other questions of why, how and what regarding my selling behaviour at a later stage.

For now, I constructed this chart which shows my selling activity during the period spanning Oct’01 to Sep’10. The small green histograms at the bottom show the distribution of my sell trades. Three clusters seem to emerge: Aug’04 to May’05; Jan’07 to Apr’07 and Aug’09 till date. I have started my investing career with a handicap – which might seem like a paradox given the upward ascent of the NIFTY since 2001. What I mean is that my investing thought process has been spawned during a whopper of a bull run. Nearly anything anyone touched during 2001-03 turned to gold. Midases were everywhere, hemlines were getting higher by the minute. Then after that 2008 and the early part of 2009 was such a humbling moment. And a great learning experience. I lost money on a few trades and the flurry of sales that you see during more recent times are my unwinding of those doomed trades as they recouped some of their lost ground. The wicked blue line represents the market – NIFTY in this case. The oscillating orange band represents the value of the market – trailing 12 month NIFTY P/E ratios. If one uses this lens to view the art of getting off the train, then it’s good to be a net seller when the NIFTY’s P/E is above 25. It pays to be a net buyer if the NIFTY P/E is below the first quartile (under or at 15). Currently the NIFTY P/E is around 24 so we are entering hilly terrain – best to tighten up our seat belts. I use the terms “net seller” and “net buyer” since even at exalted heights of market valuation one can find a few lonely bulls rampaging around and likewise the depths of market penury still throw up some bears lying in wait to maul you.

The idea is that statistics and data tell a story about your trading pattern. It is useful to step out of the frame once in a while and see things from a wider time perspective. I guess successful traders need to necessarily have oodles of experience behind them. The best minds in the business have lived through at least a couple of downturns and figured out their behavioural patterns and emotional compass. Also, when you see the picture in cinemascope, a few down months don’t seem all that frightening.

The wise ‘old’ men of investing mysteriously say – buy when you see value and sell when your asset gets expensive. but how the heck does one go about ‘seeing value’? We seem to know/have heard about things like fundamental analysis, discounted cash flows, industry compares, etc. Most of us however, do not have the time to do detailed down-to-the bone analysis of company financials. Some of us don’t even know how to go about doing it. I don’t think that such people should not participate in the markets or run scared of balance sheets and mathematics. I guess what is required for this set (I may fall in this realm) is to develop and consistently use common sensical heuristics with modest return expectations. One such rule is getting in and out depending on the movement of NIFTY P/E as compared to the two control limits as depicted in the chart. You may have a better method – gazing at tea leaves perhaps – whatever it is, I think the key is to stick to it. Economies and therfore the stock markets have a slight inbuilt bias towards expansion and growth. Therefore, the dice is loaded – but only if you stick to the same dice.

I don’t drink tea, BTW.

Filed under Market Trends Tagged with , , , , , , , ,

The Bond Bubble

20-Aug-10 3 Comments

The bubbling stories going around this week in the financial blogosphere have mostly centered on the heady climb of US treasuries. In fact the topic has been quite hot the past month but the din is getting louder now. Comparisions with the dot com bubble and the housing bubble have started doing the rounds. The yield on the 10 year US paper is currently around 1% now. Which means that if you freeze the frame today, it will take a hundred years for the interest component to add up and match the price you pay for such bonds today. The P/Es (inverse of yield) of the no-brick and no-mortar tech companies were also in the heady hundreds during 1999-00. I don’t have too much of a view since it’s all happening outside of our shores. The Small Investor writes about it here as also the links I’ve listed below: it’s important enough for us to pay attention since we have NOT decoupled ourselves from the west. It’s actually the FII money that’s driving up our local markets here. Hot money.

  • FT Alphaville on the conundrum that equity prices and bond price are now moving in step. i.e. UP!

Logically, I’d guess that the bond market is bigger, more liquid and less amenable to manipulation. So, if the bonds and the stocks are sending out conflicting messages, should one not trust the former?

However, are bond markets better predictors of the economy? I think not: since nominal GDP growth and interest rates are both driven by inflation. Correlation is NOT causality. It’s a mistake many make – if two lines A & B move in tandem, that does not necessarily mean that A and B have a causal relationship. There could be a third factor C which is driving both A & B. So, bond prices are ↑; equity markets are ↑; economic data (US) is ↔. Thats the confusion. 

  • A website called bond-bubble (what else!) has come up and the graph on it’s homepage is quite telling.

It shows the super steep rise of US public debt – almost a parabolic rise. To me this looks similar to the rise of the Chinese stock market. That looked parabolic as well ( y = 4 * A * x↑2) and it could not defy gravity. But can US debt come crashing down? Maybe – if the currency crashes.

  • That seems to be awesome news for the gold bugs! It makes the case that the bursting of the bond bubble will pave the way for a massive upsurge in gold prices. The article notes that the yellow metal shines brightest in three situations – “heightened economical/financial risk; outright inflation and/or deflation”. And therein makes the case for a coming Gold bubble! Marc Faber,  (who keeps telling people to buy gold) has been bearish on treasuries right through the start of April but no one seems to be listening.

 TULIP → SOUTH SEA → RAILROAD → ROARING TWENTIES → POSEIDON → JAPAN → DOT COM → HOUSING → BOND → IS IT GOLD NOW? 

This is making people like me (the “half informed”) even more nervous now. Ignorance is bliss – part knowledge is most painful. Anyways, the local markets are frothing on all the money that’s coming in from the US. The Fed there is busy buying up treasuries and sloshing money in their system (to buy the bonds, the Fed has to release money by paying whoever is holding bonds). They’re doing it by working their printing presses overtime spooking inflation. But I guess the game with inflation is that if you whack it too much too fast, the thing just snaps and the party careens towards deflation. I wish I had paid more attention during my economics classes. But to me it sounds logical that what comes in, goes out. So, this money will go back from where it came (at least in the interim). And all will fall down.

Though there is some more ground for the NIFTY to cover. That’s what the “experts” here are saying. The market isn’t fully stoned yet. It’s just started rolling the weed, maybe a few drags….let’s stop hallucinating. In 2008 so many of our local “experts” were shouting out that India is decoupled and that the housing bubble will not effect us. Even politicians had joined the chorous. De-coupled my moon. We are as joined to the US hip as our big bro in the vicinity.

Maybe I’ll be able to call the top.

Filed under Uncategorized Tagged with , , , , , , , , , , , , , , , , , , , , , , , ,

Shakti Met Dor

30-Jul-10 1 Comment

Here is another dilemma that I face now. I had invested in Shakti Met-dor about a month back. The company looked undervalued, some people were beginning to notice and write about it but the charts were not indicating anything stellar to me – at least then. I was more happy to cream off 7 – 8% in about a month’s time and get out. I am sitting on an upside of 26% now. Of course, my digging around on the net had made me aware of a much larger upside that was possible on this stock. So I was waiting for the market to discover the hidden value in it – perhaps around the time of it’s quarterly results declaration? I also thought it a good omen to have dumped some money on the stock of a company which is domiciled in the same city where I am working currently.

The company fabricates doors and windows. That’s it. My money is hinging on these humble pieces of building fitout equipment. Doors and windows are not cool enough, I guess. Maybe that’s why the company has never really been able to command a good enough valuation despite doing pretty well for itself. Some time back it recently upped its manfucturing capacity and no one seemed to have noticed back then. The additional capacity seems to have come on board and the additional widgets are now contributing to the bottom line. The coffers seem to be filling up and now people are starting to see it on their screens due to the falling P/E ratio.

What’s my dillemma? When to sell. Again. The same problem.

And what’s the catch? The management – or so it seems. They must have realised that since the market cares two hoots about them, it was time they got out of the party where they were not invited. They now want to delist. The promoters own around 55% and it may seem that they have a long way to go (SEBI requires 90% ownership for promoters before they can slink away). But there’s more to it – we need to open our doors of perception wider. The problem is that, in true Pareto style, just about 100 shareholders seem to own around 90% of the stock under issue. I am afraid that if the management is able to corner these 100, then I’m done for. Who knows what relation exists between these 100 and the management? I hope they do not locate me – but that seems difficult as I work just 7 kms from their head office. The website of the company is nothing great. I am sure some creative webmaster can create quite a few interesting themes with doors and windows opening and closing on their website. They do not have an investor relations page or section but that’s all undestandable since the management has said that the reason for seeking an exit from the listed secondary market is the heavy burden of listing and exchange fees that the company has to bear. If that is such a heavy expense then why would they ever want to pay a few thousands to a web designer to spruce up their website? But despite the frugal website, they have managed to slip in an extract about their company culture (Career With Us >> Our Culture) which should help us investors:

“Openness: We like to be ethical, fair and forthright in all our endeavors; openness not just in the sharing of knowledge across the organization, but also in terms of respecting the feedback given by our people.”

I hope they feel the same about their investors? Or are some investors more investors per share of holding than others?

Despite such nobility, there is some speculation that the promoters have been quietly ferreting away bite sized chunks of shares away from the market ever since 1998 and do not appear to have been open and honest about it. That sounds like fraud to me. Stock analyst Mudar Pathreya said all this and also a bit more in his interview to CNBC-TV18 on 27Jul’10. He says that the company should be worth more than Rs. 500/share and advises shareholders to hold on.

Where is SEBI when it is needed the most? I need you, SEBI for I need to make money. I remember Prof. A, who during my first year of management studies had remonstrated very vigorously and animatedly:

“SEBI should be plucked out and thrown into the Arabian Sea”.

 Serious, risk averse dyed-in-the-wool kind of value investors will stay away and look the other way. But I am greedy. Greed is good. Greed is good.

Filed under Trade Roll Tagged with , , , , , ,

← Older posts

Follow

Get every new post delivered to your Inbox.

Join 60 other followers