Godrej Industries Limited – 2Q11

A deluge of work kept me away from the keys momentarily. As I had said in some of my previous posts, I am massively long Godrej Industries Limited. While the stock has moved up quite a bit since my first post on it dated 11Jul’10 it did give back some 13% of its gains during the previous 45 days or so. I am perfectly happy with the situation. The position is net up 34% (weighted average) for me over the past 5 months that I’ve been holding it. I guess I was lucky to have bought into it at a good time and from here on I am content for it to give me a slow and steady compounding. In fact the purchase logic was based on the diversification that GIL gives – given it’s 69.4% and 23.4% holding in Godrej Properties Limited (GPL) and Godrej Consumer Products Limited (GCPL) respectively (and other group companies). Of course, there is the native chemicals business of GIL as well . While holding companies will never trade at a sum predicated by the value of their assets, the beta reduces as compared to a direct exposure to GPL. In the case of holding companies, the sum of parts is always less than the whole.

The quartely results of GIL were announced on 27Oct’10. The net profit on a QoQ basis increased by 12.5%; their chemicals and agri business is looking up and other regulation stuff. Nothing much to write home about the results – along expected lines of the company and the analysts. There was an expressed fear about inflaton eating into the profits of GCPL but that did not happen. The possible hardering of the interest rates could eat into the margins of consumer durables industry though which is generally believed to be a rate sensitive sector like auto. That remains to be seen.

I keep tracking the news stories about GIL fairly regularly. The company has certainly kept the news wires busy in the past months. I don’t know why but I end up investing in companies which use Bollywood and regional film personalities to peddle their products. A lot of names have been coming up in my alerts on GIL – the likes of Raveena Tandon, Soha Ali Khan, Vijayalaxmi, Malaika Arora Khan, Vidya Balan, Mugdha Godse et al. The other company whose products are endorsed by stars is Gitanjali Gems, which is now up a further 10% since my last post on it dated 25Oct’10. Cool. Here are some other important news stories that I caught re Godrej Industries:

– The new Godrej Appliances ad tries to shift the customers’ focus from refrigerators to other white goods. The company sells one fridge every 30 seconds in India so they’re correct in spending ad money on stuff other than fridges. The other good thing about the ad is that it does not feature Preity Zinta – which is a good change, according to me!

– Godrej Agrovet is exploring acquisitions in micro irrigation (competition for my other position in Jain Irrigation?). The prime minister shook a lot of hands in Malaysia recently – maybe that bodes well for Godrej Agrovet’s palm oil business?

– I keep the Godrej hand sanitiser (Protekt) at my work place. It’s good. This market (currently at 25 – 30 crores only) is growing at 50% per annum and is in its infancy. GCPL is eyeing a quarter of this pie.

– GPL expects it’s revenues to rise 50% this fiscal. There have been a few assorted stories saying that realty stocks will fall since the RBI has come out with tougher norms for bank lending to the housing sector. I don’t subscribe to that view. Point being, first time home buyers can always borrow the additional 5% – 10% from family while older home buyers should have the necessary funds. In any case, 1) GPL wants to increasingly focus on affordable housing in cities like Nagpur and Kanpur – where the demand should continue to remain high and 2) some banks were anyways calculating the % of finance at 85% of property value+ stamp duty. There is a tremendous ambition in smaller towns to go upscale and improve the quality of lives – and GPL should benefit. There is another company called Ashiana Housing Limited – which looks reasonably priced and is also following the joint venture model of GPL. Need to check on that story. But later.

– They’re looking to merge GCPL with Godrej Household Products Ltd (GHPL). GCPL is keen on acquiring FMCG firms, particularly in hair colouring, household insecticide and personal wash segments in Asia, Africa and South America. Good luck on that. The proces of consolidation will show whether GCPL can truly make itself over into a true multinational with a common footprint across multiple countries rather than merely being a company with a motley collection of stakes in various companies across the occident and the dark continent.

– Close to 80% of construction of GPL will be for residential purposes. Thankfully, we need not worry about SEZs and other commerical sales, which are highly correlated to business environment. The good thing about GPL (had mentioned in previous posts) is that it just wants to focus on its core area of expertise – getting the projects, the JVs with land owners, marketing and sales and using its brand pull to get in the home buyers.

– While the focus is on affordable housing in the 25 lakh bracket, GPL also has its game right in the mecca of big property in this country: Bombay. The story about it’s gigantic plot of land in Vikhroli is old hat. What’s new is the JV with Bombay Footwear to develop 1.5 lakh sq ft in Chembur and a MoU with Jet Airways to deliver 1 million sq ft of office space in Bandra Kurla Complex.

Mutual funds have been on a selling spree while the Foreign Institutional Investors lap up our desi shares. GIL however has been on the buy list of the fund houses like DSP, Edelweiss, HDFC and Religare. I am ready to load up more on my already massively long, passively managed position but it needs to dip down (on unrelated news). Till such time I will have to keep suffering Preity Zinta I guess. Cheers.

SEBI and other things

The Securities and Exchange Board of India has been in cracking form last week. Or so it seems. I like reading about C.B. Bhave and SEBI – the comment of one of my professors, “SEBI should be plucked and thrown into the Arabian Sea” notwithstanding. But that was in mid 1998 when D.R. Mehta was its Chairman. More on SEBI shenanigans later. Some of the things that caught my eye:

–          Increase of retail portion for application to IPOs to INR 2 lakh. Which is cool if we keep seeing more issues like Coal India Limited. I do not personally like to invest in IPOs but issues like CIL make one happy given the 5% discount to the retail rats. Moreover, in the case of CIL, the quality of paper was good as also the huge institutional interest. I have not done much snooping around on the internet to figure out what the allocation is likely to be but I am hoping for a 12% – 15% return in less than a month’s time! Let’s see. My means and expectations are modest.

 –          Crackdown on shady promoters who keeping issuing warrants to themselves at a steep discount during bull runs. Since most of the conversion money is to be paid during the warrant exercise date,  a sudden correction does not cut too deep for such warrant holding promoters. So this is a good proactive step in favour of minority shareholders. I was in the ‘minority’ report of Shakti Met Dor before I sold out on 07Oct’10 at a loss of 5%. The promoter credentials and their move to delist the company at what appears to be an artificially suppressed market value did not enthuse much confidence. FIIs have come in and done their bit in India but this stock has stuck to its price since the time I sold out. Good riddance.

–          IPOs for insurance companies. Nice! For once, the IRDA agreed! I am sure many more of those emotional HDFC Standard Life ads will start hitting the boob tube in a year or so. This is one good step towards the opening up of the insurance sector. Currently, there is a cap on how much Foreign Direct Investment (FDI) an Indian partner can bring in into its insurance venture. I do not know why Pranab Mukherjee cosies up so much with the IRDA but there was a recent soundbite where he observed that SEBI and IRDA were quarelling like petulant children. Was the ULIP bickering set up by New Delhi so that the Finance Ministry gets a firmer grip over SEBI?

– Options will now feature European exercises as well. As if they were not complicated enough! Europeans are cheaper than Americans so its good. The latter can be exercized at any time during the contract period while the former need to triggered only at the end. I don’t think I give a rats ass to European or American methods of exits. All I want is cheap long dated index options and I will be happy in my bermudas. I have such simple needs.

– The Mutual Fund industry squarely blames SEBI for rendering it comatose. There has been so much of bleeding with investors taking out money from fund houses’ coffers that the latter are now resembling leaky ketchup factories. Three blows fell really:

        Punch on the MF nose: Banning of the entry loads

        Ow! The stunner left hook: All strata of investors in MFs to have similar exit loads.

        Knock Out…the final uppercut: Mark your debt assets at the market.

These are good moves from the end (read small) investor point of view but if there is no sea then there’s no fish either, right?

–          And the clincher: SEBI will now be the sole regulator of all organized financial transactions. The IRDA, the Reserve Bank of India (RBI), the Forward Markets Commission (FMC) will all accede to it. RBI’s star seems to be in its descendent. You probably know that the Government of India is the bigger debtor of the nation and therefore the RBI. So what do you do if you cannot repay? If you a small, wretched villager in Andhra Pradesh distressed in some micro debt you’d commit suicide. But if you were the GoI you’d want to print more money and debase the value of your debt. Recalcitrant RBI guvs have always been a thorn in the flesh for the Finance Ministries at Delhi. Try noticing this – every time Pranab Mukherjee says something regarding exchange rates, inflation control, the FII ‘hot money’ pat comes the counter-view from the RBI guv. Also note that the FM’s view is part of a major front page story while the RBI piece typically appears one day later and its hidden somewhere in the inner pages. But that’s digressing.

To the more informed market participants, there appears to be a lot of dirty linen in SEBI closets and some of it has indeed been cut and pasted in the internet as banners of SEBI’s double standards and doule entendres: Current chairman being the common link between the securities scam at NSDL and the abrupt cessation of investigation from SEBI later on. SEBI’s spineless conduct during the Mehta and Parikh vaccum cleaning of the market. The super-fast-track exemption granted to Bharti desisting it from making an open offer during the MTN talks. etc.

C.B. Bhave may or may not have been guilty in the NSDL scam as alleged in some parts of the financial media. But it is a tough ask navigating the markets especially when his organisation has absolute powers and there is big money involved. I wonder if they teach Arthashashtra and Chess in the IAS.

The informed seem to detest this institution enjoying legislative, executive and judicial powers all together. In fact SEBI appears to have far more teeth that the US SEC. However, for the public at large, the instiution has earned a mix of a Robin Hood and Chulbul Pandey kind of reputation. While the capital markets’ cognoscenti will see more than what meets the common eye, the masses will always get a reassuring feel when blurbs like SEBIs ban on FIIs like Barclays’ & Societe Generale’s P-Notes,  individuals like Samir Arora, Shankar Sharma and various sundry brokers and promotor groups etc.

But does SEBI do things only when provoked and is it guilty of not touching the real issues? It is definitely newsworthy but is it worthy of news?

Gitanjali Gems Limited

The light is shattered into gold on every cloud, my darling, and it scatters gems in profusion.

Mirth spreads from leaf to leaf, my darling, and gladness without measure.

The heaven’s river has drowned its banks and the flood of joy is abroad

 – from Rabindranath Tagore’s anthology of poems called Gitanjali 

I had picked up Gitanjali Gems on 29Apr’10 and have been holding it since then. The point of my purchase is shown as the green star on the chart alongside. The timing looks awesome but I don’t really care – I’ve gone through the motions quite a few number of times by now. What I am really focused on and trying to discover is a personal method that helps me to know the right time to sell. If I can reach that stage of ‘enlightenment’ by my next birthday, I would have really matured as an investor – in my opinion. Coming back to Gitanjali Gems, it has been an awesome climb, right? In all of 6 months! So is it time to say bye to bling bling? I don’t think so. Why? I like it! Reason enough? It better be!

Take a look at its website and you’d be forgiven to think that u’d landed at some Bollywood portal given that Neha Dhupia, Salman Khan, Katrina Kaif and Kareena Kapoor glitter through in huge 4” by 8.5″ sized banner frames!  At least in my browser window. As if personifying Nakshatra, D’damas, Gili and Asmi. And that’s the point – the company has been so successful in transforming these product names into integrated brands with massive recall. There’s Sangini and Vivaaha as well. Shahrukh Khan is also hidden somewhere in the inner pages of the website – try that ‘treasure hunt’ search if you have nothing else to do and are fully invested in this company.

The CMP of 285 currently discounts it’s trailing 12 month earnings 12 times. It was 5 times when I had purchased it. The company is selling for INR 2,400 crores which is about 530 million USD. Given that it has ambitions of becoming a global brand, that number does not look out of whack, especially when you consider that the mcap/sales ratio of it’s sterling competitor, Titan Industries is 3.3 as compared to 0.71 for Gitanjali. Moreover, Titan Industries’ Tanishq is more into gold as opposed to diamonds. And how does that matter? The shine of diamonds is more than the glow of gold – i.e. margins in diamond retail is more than gold jewelley. Gold has appreciated 17% (in INR terms) in the past one year while diamonds have become dearer by 25%. But since Gitanjali has stake in Tanzania’s bloody mines the raw material price spike will not hurt as much. I think going forward more and more people will start comparing Titan to Gitaljali (if they are not doing so already) and perhaps that will make some difference. The labour required to cut is more than the effort needed to goldsmith. Not high at all, I’d guess. Speaking of global ambitions, the company has recently acquired an Italian jewellery and design firm,

It spent INR 25 crores servicing its debt in 1Q11 which is approximately 2.5% of what it sold. In that sense, the big question mark is the retail foray. Why get into making malls and infrastructure when diamonds are forever? Will they add more leverage to their balance sheet? My hunch is that the Italian Job and/or the SEZ fling will increase the interest costs for the company – let’s see.

I think I will hold on given that this position of mine has perked up 144% in double quick time, so even if it corrects I’ll be cool. The technicals are shooting up full steam ahead and the share has seen a near parabolic climb recently. So some steam will definitely get let out. My investment logic was never based on such crappy observations that Indians are getting urbanized and therefore they’ll shun traditional gold ornaments and stud themselves with diamonds. The market leader in branded diamond jewellery was available at a market cap of INR 980 crores only. So while it was not some Grahamian deep discount discovery but there indeed was lot of money on the table to pick up. Now, however, it looks like a traditional and boring growth story. But even a slow and steady rise of 15% per annum will make it a 3 bagger for me in 18 months or so! The anticipated deluge of US hot money notwithstanding. If that target is reached much sooner, then I’ll jump out. But wait. Is this not a retail stock? And don’t retail companies, especially ones with a glittering track record and market leaders in their segment get high multiples? If we assume an EPS of 30 for close of next financial year, it’s forward P/E comes to 9.5 only. Plebian, male names sell at such high forward P/Es. When will India and Indians give equal opportunity to females, I wonder. Look at the table below to see what I mean. Gitanjali means an offering/anthology of songs. Would it have made any difference to its valuation if Mehul Choksi would have called his company Upanishad Jewels? ( = anthology of teachings from Vedic Hinduism) Or maybe his choosing the name Gitanjali might have been quite a prescient flash then? I don’t know what these boring boys are doing with jewels and diamonds – let’s leave them for pretty girls like Gitanjali and focus on making money instead.

And please do not ask me why I did not buy this stock when it was INR 34 (Mar 2009) if I am really as smart as I pretend to be.

Structured Equity Products

First things first – daughter gets through the national round of the spelling bee that was held in Kolkata. International round is next.

Yesterday, someone asked me to analyse a structured equity product which the wealth management group of a well known private bank had pushed for his consideration and possible investment. This was a “structured” equity linked debenture with a pay-out in the form of a knock out barrier option. If I have not lost you yet and if you aren’t KO’d, you may want to take a peep at the term sheet here. In a nutshell, what this instrument is saying is that it’ll pay you regardless of the NIFTY tanking down. If on any of the predefined monthly observation dates, the NIFTY breaches a preset barrier, then a knock out event would have happened and investors will get a fixed return of 27.5% for 24 months.  This is equivalent to investing in a fixed income instrument (bond) that gives an annual return of 11.4%. Note that with QE2, and a new wave of cheap US money expected to flood our markets the chances of the barrier getting knocked out in the short term remains extremely high. so then all that this means is that you are holding a pure fixed income instrument. The hastily scribbled payoff diagram above tries to show what I think this gives us.

“Structured” equity notes seems to be an INR 15,000 crore industry having been introduced only 4 years back in the Indian market. These class of products are quite popular in Asia and with increasing volatility expected due to increasing wads of hot money coming down to Asia, the popularity of such instruments should grow. That is really a problem since it does not seem cool to buy these things. Why? Because these are just plain and simple fixed income instruments at heart masquerading as sexy and exotic equity junkets. The annual yield of 11.4% really does not look quite cool when one considers A) the prospect of interest rates rising locally as the RBI grapples to control inflation and B) the management fee of 2 – 2.5% that such structures entail. Just 9% after taking out the fees. Also, this is not risk free for it entails taking on the credit risk of the issuer. There is no liquidity as well so the managers of such structures do not have much of a duration risk to manage – so what for this 2 – 2.5% fee? That fee, really is to justify the enormous amount of finacial acumen and spreadsheet crunching calculations that goes under anything that swishes using guiles like “structured”, “Knock Out”, “Barrier”, “Participation” etc. Investors who put their money behind such ventures must be feeling really hep and smart about themselves. Imagine having protected your capital (ok, not all of it, 97.5% perhaps 🙂 ) and also participating in the run up of NIFTY. Wouldn’t such males love to brag about it to whoever cares to listen – if some female ears patronise their trumpeting, then all the better! I don’t think I’m stretching the issue – do a random survey, I can bet my widgets that the proportion of investing females that pick up this product would be far lesser than the proportion of investing males that do the same.

SEBI made capital protection on such instruments mandatory some time back, so that lends some saving grace for such macho investors. Thankfully, most ticket sizes (i.e. face value of such debentures/notes) are 1 lakh plus so that means that macho men of modest means will not be able to participate here. Which is good, but then there was this CIO of an asset management house making a case for peddling this for an investment level as low as INR 5000! Wow! That makes it a mass market structured kill! That was from an article that was published in early 2008. In fact the more noise about such products more are the chances that we might be nearing really overbought market levels.  The point behind introducing a sexist angle to this barrier is simply to make a strong point in favour of restricting investing to products and asset classes that one understands. I know most of you would agree that there is nothing hep or cool about buying such notes, but I also do know that if some of you did buy it under whatever compomising situations then a part of you would trumpet. Avoid that. The process of amassing wealth through investing is utterly boring and almost emasculated, if I daresay.

The latent desire that such products seek to serve still needs addressing though. You have a section of the HNI/well heeled type of investors who get edgy whenever the benchmarks seem like peaking up and there is an increase in volatility. The psychological weightage that such investors apply to the act of capital preservation becomes higher. Which is again correct. But I kind of disagree in getting blindsided by the hype around these products and only using such notes to achieve that end. 9% return. Investors would be better off buying a high rated bond (of similar maturity)directly. Picking up a balanced mutual fund might require active monitoring of the fund managers’ actions (since a rising market might invoke some managers’ to increase their allocation to equity in a balanced fund making the risk – reward ratio lean towards the risk side). If you must do something whacky, then take a look at the crude payoff diagram of this structure that I have shown above. What base building blocks can be combined to create something similar to this?

An option strategy called the bull call spread, where one buys an at the money call and simltaneously sells an out of money call at a strike that is around the participation rate of the above structure should achieve a similar payoff. The quantity of options should be scaled up depending on the participation rate of the structure. The net premium paid will be one part of your investment. The balance can be put to work by buying a simple fixed income instrument. And you are home – your manliness intact (if that matters to you!). The hitch here could be finding long dated options – most of you would be using common online trading screens of retail brokerages and the max that you’ll get is a quarter’s look forward. This is something I have not explored myself but what I suggest is that next time your banks’ investment planner or relationship manager calls you, instead of finding an excuse and disconnecting ask that person to give you quotes (i.e. premiums) if you were to purchase/sell long dated options of NIFTY. The premiums would be high, no doubt – but I don’t even know how high. So, it’s a line that at least I am waiting to pick up. Will the bank really negotiate hard for me and try to find me a good deal? Will my notional be high enough for anyone to be really interested in? Does my bank have a prop trading arm where they are be a counterparty to my macho designs? I don’t know the answers to any of these questions – but yes, I am interested in long dated index options, if cost effective.

Trade Ideas – Oct’10

Some trading ideas are occupying my mind at the moment. Much was said about the QE2 in the previous post but free capital must be employed and given my nervous, edgy nature these days, I prefer flitting in and out of positions hoping to compound to a modest proportion. While I am contemplating these opportunities that caught my eye yesterday, let me set the background score with these opening lines from Charles Dickens’ masterpiece about duality:

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.

In fact some lines from the book are so very apt in the current global financial markets:

The Fed to all of us: “Keep where you are because, if I should make a mistake, it could never be set right in your lifetime”. Also, “For I’m the devil at quick mistakes, and when I make one it takes the form of Lead”

The global economy to its planners: “Crush humanity (read economy) out of shape once more, under similar  hammers (read printing presses), and it will twist itself into the same tortured forms”.

Inflation rate in US to whoever cares to listen: “It is a far, far better thing I do, than I have ever done; it is a far, far better rest that I go to than I have ever known”.

And so on. These are issues far beyond my full comprehension, so I’ll do what I am forced to do – seek some new punts and see what happens. I just can’t remain still for long. And rotting my money in the bank is criminal.

1. Jain Irrigation Systems: I know that this seems to be a fairly valued stock with it’s 1 yr forward P/E running at 30 and that it’s market cap is in the region of INR 8,700 crores (= USD 1.9 billion) on an expected FY11 sales figure of INR 4,200 crores (= USD 933 million). The stock has recently seen a 1 yr forward P/E band of 33-34 as well, so on that logic there could be some steam there. The company has compounded it’s revenues at a crazy 40% CAGR over the past 5 years using a mix of organic (!) and inorganic methods. So, the market obviously feels that this kind of growth will continue into the future (say 3 – 5 more years) and that’s why a P/E of <40 appears justified. But I am not sure if net earnings growth will also grow at the same clip. Currently, around 6% of the money that the company earns goes into servicing its debt. But I picked up a (moderate sized) position today as I feel that there is a short term 10% – 15% opportunity here. Another important point for me is that this company is from my home district, Jalgaon so I do feel my agrarian roots rising up as I sow this small packet of capital here. But really, the company is cool, having delivered world class drip irrigation methods to a country so sapped of water. It is now pioneering the concept of using drip techniques for paddy – the killer crop when it comes to water requirements. If that clicks, then it will be awesome for the country. From the chart above, I guess 1050-1075 seems to be a support level and given the Lower Bollinger Band touch, a negative plunge of the MACD and a code red, buy signal from the RSI, I will venture out here. A mental stop loss of 1000 is in place. 1000 also appears to be the next support? Lets see.

2. Balmer Lawrie: We have been hearing and reading so much about logistics and transportation being a huge opportunity that many of us may not even bother to check if the story still has some room for possible fresh investments. I have invested in and out of Balmer Lawrie in the past and like the logic for Jain Irrigation above, I guess this could turn out to a small, skim the top kind of opportunity. But in this case, I would be content to hold on to this stock for longer given that A) it is cheaper than Jain Irrigation and B) I am familiar with the company. I once worked in an office buidling next to a Balmer Lawrie Grease Division plant and I like to believe that the proximity and therefore some induction effect helped me make money on this counter in the past! I have not yet taken a position here but the chart on the right looks tempting to me.

 3. Banco Products: What I am really doing is flipping coins between Balmer Lawrie and Banco Products. This one is a Gujarat based company which has been around for 50 years but appears to be selling cheaply as well. It has made auto-equipment all these years and is now getting into cement business as well. Duh. It supplies it’s gaskets and radiators to companies like Tata Motors, TVS Suzuki, M&M, Maruti Udyog etc. It’s operating margins (@ 26%) are highest amongst peer group companies like Bosch, Bharat Seats and UCAL fuel systems. With an expectation of a FY’11 EPS of 12, the CMP gets discounted 9.25 times – that’s not bad. This really has been a turnaround story over the past couple of years with the share price jumping up from the 20s to the current 110 levels. Given the market cap of INR 800 crores (= USD 178 million) over an expected sales of INR 550 – 575 crores for FY’11, the stock still looks a tad cheap. Recently they acquired a company in Europe and are setting up a cement plant in Tanzania. Seems like these guys are confident of what they are doing. On the charts, I see a Bollinger Squeeze which to me means that it can shoot up or down from here. But the RSI and MACD are not there yet for me. I am biased towards Banco, so I think I’ll throw in some coins tomorrow. Let’s see.

4. Talwalkars Fitness; KSB Pumps; MIC Electronics were other punts that came to mind. And a long term possibility on TV Today (but that requires more thought, and I don’t have time at the moment. Maybe later this week).

(I had taken a position on 31Aug’10 in MIC Electronics and written about it in my Earths, Lights and Money post but got out with a 14%. It has corrected only around 8% since then. I’m not fully sure but I do want to hitch a ride on it again and again since the story appeals to me a lot)

QE2′s Titanic Voyage

The QE2, now moored at Dubai is a magnificent ship. It is an awesome flotilla of human engineering with 5 restaurants, 2 cafes; 3 swimming pools; a pub, a nightclub and several bars; a casino; a 481 seater cinema; shops; health clubs; the largest floating library and a hospital – all comprising an ecosystem of 3000 people (incl full roster of passengers) that circumnavigates around the world in 80 days. Given the cacophony of the other QE2 (Quantitative Easing, proposed & hopefully stillborn Round 2) in the US, I try to compare this Cunard marvel to the US economy. I randomly switch between QE2, the ship and the Fed’s QE2 (the raising of a shipwreck)

I have been absorbing and echoing popular thoughts that the recent Indian market rally has been fuelled by Foreign Institutional Investment (FII) related flows and that once this spigot runs dry, we’ll have a nice juicy correction. A big enough gash to seriously bleed the short term traders. But I never counted on the Fed docks building and launching another armada of liquidity into the markets! The US docks, from this perspective just never seem to run dry. And now I am big time confused. The QE2 rush of dollars will only add fuel to the fire, right? So, will we be seeing a near parabolic rise in Indian equity? Will the Diwali rockets fire up real high this year? You may have noted my aversion to seeing parabolas in stock charts from some of my past posts and the accompanying note that parabolas are not self-sustaining. Good for the Indian Government really – considering the slew of paper that is about to be thrown into the ring.

Like QE2, the American economy moves slowly and consumes a lot. The QE2 reportedly moves a cool 40 – 50 feet per gallon of fuel. That implies a mileage of 3.7 meters per litre of fuel. A snail (if blown up proportionately) will be supersonic in comparision, I guess. Like the ship, the American economy is moribund and is crawling towards what many are calling a recession? The QE2 has been navigated by 23 Captains till date, the Fed on the other hand has seen only 14 Chairmen at its helm. The QE2 was introduced in 1967, the Fed came about in 1913. The Fed Chairmen are quite sticky: like barnacles I guess. The QE2, when it was floating around used to consume 430 tons of fuels per day. My back of the envelope suggests that the US drinks 2.3 million tonnes of gasoline a day. I guess India’s figure is at 100 million tonnes of petrol a year.

The other important point is that the Royal Navy recruited the QE2 in 1982 to serve the original Queen in the Falklands War. Similarily, the Fed Captain is pushing QE2 to prepare for war. Only this time it will be a war that will be played out on the currency screens of traders across the world. We seem to be bracing for a full scale global currency war as the QE2 sets float. The difference being that this new artifact from the Fed is being pressed into service on an already raging sea of liquidity. The voyage around Tierra del Fuego has always been notorious – imagine creating a tsunami on a particularly nasty day aross this southern tip of South America as a solution to taking ships over and around the bend! Davy Jones Locker, surely. That too a man-made artificial tsunami. That’s what the Fed is doing, I think. Raising the waves in the hope that domestic (read US) yatchs, boats, dinghies and sundry canoes will start ‘consuming’ the momentum by hoisting up their sails, revving up their motors, rigging up the tow lines and picking up their sculls. Really? What many think is that nature will always choose the path of least resistance and this extra liquidity will quit the Atlantic and flow down towards more Pacific waters. Whither QE2? What will it achieve if that happens?

And finally one last lesson to pick up from QE2. It’s new owner is the Nakheel Group – an Asian real estate group with diversified interests in asset management, liesure and real estate whose website, just like the QE2 seems to be quite slow. The lesson is that developing nations one day will get tired of having to bear the responsibility of mopping up all of this money that the QE2 is spilling out. Unfortunately, it’s not a cornucopia – it’s really a runny nose. And the virus is catching on fast. Emerging economies will one day realise that they’d be better off buying US assets and directly injecting equity into the US system as opposed to buying the rapidly falling US Dollar. If the US domestic investment does not get kickstarted by this QE2, can foreigners buy mines, companies, set up offices in the US and provide employment directly? Can they, is the other question. Arnold Schwarzenegger is touring Asia to see who can build a high speed train system for California.

 The war is on. We saw two wars around the time the gold standard was abolished and the major countries of that age took it upon themselves to support local inflation by printing currency to fund war. After the dust had settled down,  the US dollar was to be much more than just the national currency of the US. After the gold standard was abolished, the US was at its zenith, unscathed by the World Wars and it took it upon itself to make the USD a truly global medium of exchange. The people managing the USD (the Fed Captains) therefore, theoretically at least had a global responsibility. They still have. The point is that when the Fed does things like QE2, the pain is equally felt everywhere. That is why this unilateral stewardship of the world economy will make the recalcitrant new kids on the block itching to pick up a fight. The rednecks will stolidly hang on to their artifical currency pegs while the boys in blue will stoke up local inflation. Common man will get crushed under the weight of rising prices and a Government might fall.

Additional reading:

  1. A view from Infosys’ Think Flat blog: Will QE2 sail or sink?
  2. A caption that I do not agree with: QE2 to speed triumph of emerging markets

When to Sell – Part Two

In my post titled Portrait of a Portfolio, I had talked about my conscious shift towards a higher frequency of trading since the start of this calendar year. A lot many informed voices were then pointing out to increasing choppiness and therefore the need to be nimble and hit the right spots in terms of stock selection. The standard ham was “India is a growth and domestic consumpition driven story – long term trajectory remains upwards – but there is a lot of pain in the international markets – higher volatility is expected – cannot predict what the market will do by end of 2010 but stock specific action will abound”. Since I personally agreed to this prognosis and also since a relatively high frequency style of trading/investing suits my personality, I applied this mantra not just to that Portfolio I talked about on 7Oct’10, but to the entire block of personal capital that I ‘play’ with.

A natural consequence of the rapid churing out of my positions is a sharp reduction in the average holding period of my trade positions. These days I have been holding my positions for an average of 45 – 60 days only! This is in stark contrast to the 500+ days positions I normally used to have prior to the crash of the previous year. So, as part of the ongoing effort to gather insights on the best method of selling out, I tried to look at the relation between the returns that I have earned and the time I have spent in nurturing my trades. I took all the 306 odd closed trades that I have on me since May’03 and tried to stack up the (weighted) average returns across the corresponding holding period in calendar days. The chart shown on the right is what came about. The picture in inset shows the same chart with the full range of the y-axis (representing % returns) – I could not resist blowing my trumpet on the 18 bagger investment of mine which I held on for a good 978 calendar days. It was not a black swan – though it is an outlier on the chart – there was logic and conviction backing that trade all the way. I really don’t know if it’s just poor me or even other market players are currently feeling that the age of finding such skyscrapers has passed us by. Anyways, the main body of the chart is squeezed into a narrower vertical range to bring out more detail on the other trades.

Some interesting observations and takeaways come about. I guess, some of these might be applicable to you as well since like it or not us amateurs seem to be cut from the same cloth:

  1. There is clearly no optimum holding period, but in the past 7 years or so the longer term holds win. They have the potential to compound much faster than the market. I spent a few minutes trying to isolate the high yielding tenures and checking if some logical pattern applies to the number of these days. Fibonacci Series? Nope. Prime (numbers) days? No. Numerologically significant days? Absolutely not! What is abundantly clear (at least to me) is that longer the hold, better off you will be provided you keep monitoring and assessing the position every now and then. Personally for me that is a challenge. See, when I started investing, a 3 year time horizon represented 11% of my lifetime! For someone like a WB, a 3 year hold represents 3.75% of his lifetime. The concept of time, patience and maturity is different. However, I cannot wait to grow old to hold for longer time periods and therefore compoung well and high. Who’ll have the inclination to purchase a Ferrowatch at age of 80! And as Adam Smith said, “In the long run we are dead”. Therefore, for me another takeaway from this data representation, though oblique, is that invest when young but think like an octogenarian. A smattering of maturity ahead of one’s chronological age might be the most important thing – apart from luck.
  2. Then there is the importance of stop losses. As I mentioned in some of the previous posts, for an average investor like me, with a full day/late evening job it is impossible to pour over balance sheets, interview managements (ha ha), overlay companies’ prospects in the context of larger economy and all that ‘bull’. I am also not the kind of guy who will read a research report from a brokerage house to invest. Not for me the kind of consensus building investing that some kind of people prefer – call up a hundred contacts from your phone’s address book and bounce an investing idea off them – and if most agree, then invest. My phone’s address book is quite impoverished anyways. So I guess what works for me is a ruthless culling off of losing positions – regardless of the long term, hidden value spiel. As long as the general trend of the local economy is expansive I am cool. This inbuilt bias in equity markets to rise tells me that while such an edgy response to volatility/corrections may not result in the most optimal of returns I think I will make enough to take care of the added burden that transaction costs and taxes place on such behaviour. That’s what I am thinking right now – but remain open to change my view as I “mature”.
  3. One last point regaring the sea of red at longer holding periods. This is my personal example of loss avoidance – of ego triumphing over prudence. Of imprudent youth putting false hopes of a turnaround. An example is the “Stupid Mining Company” trade of mine – when price falls, you just don’t care if it falls another 20% – 30% more, right? How does it matter? A loss is a loss. It was at a particular level once, it will surely climb back and beyond, right? Well, try plotting your own personal chart like the one above – then ask yourself these questions again. The fear of booking a loss is something I think I have hopefully gotten over now. And one should know when to call it a day. While my personal data may not be representative, the reds are concerntrated towards the right of the chart. That’s poor management of capital indeed! I guess what I am implying is that a dud can be spotted in a year or two – it does not require more than that (even if you are the oldest, most “mature” value junkie) to pull out one’s precious capital and put it to work elsewhere.


Oh! Calcutta

I was in Calcutta over the weekend. I like the city. I guess it was after some 15 years or so that I visited this eastern Metropolis where it starts getting dark at 5:30PM (during this part of the year) itself. Bits and pieces of this neglected city have changed – many parts remain the same. Cars are smaller and therefore quite numerous on the many narrow lanes. There is still a lot of seemingly hostile but good natured haggling over daily transactions, which I admire in this part of the country. A successful haggle results in an exchange of not just currency notes and coins – sweat and grime change hands too. The climate is quite humid and the Ganges is quite muddy furiously blushing at the confession of sins that it brings in all along it’s flow. I managed to fight my way using a few broken, mispronounced words in the local dialect and restrict a particular cab fare to 100 rupees instead of the 120 that was being asked for. When in Rome, do as the Romans do. Speaking of coins, I guess this is perhaps the only major city where 25 paise coins are still in currency.  I felt nostalgic since the scene reminds me of my childhood spent in Eastern India – red soil, open spaces (on the outskirts of Calcutta now) and the relatively slow pace of life. And the fact that a 10 rupee note goes a long way here. While I did not board a bus, but was craning my neck to to catch a glimpse of the “cash fans” – the bus conductors here, fold up currency notes longitudinally into slim rectangles and use each gap between their fingers in the palm of their hand as placeholders – the gap between the index and the middle for fivers; the middle and the ring holding up the tens while the ring and the pinky holding on to the fifty rupee notes! I am not sure of this distribution – but I did not get a chance to verify. It looks (or used to) like an expensive fan. I saw this 15 years back and became a fan of wristy conductors. Maybe by now, with a change of government in West Bengal, the conductors have got shoulder sling bags made of leather like their counterparts in Bombay. Maybe not – only citizens of Calcutta that travel in busses can elaborate. The yellow toad-like taxis are everywhere – these run on (2 x reading + 2) meters while the white ones represent the privately negotiated OTC market. These are the dinosaurs on Indian roads – the Ambassadors. The dexterity of the drivers though would rival any accomplished drag racer anyday. Or Pokemon. Or Garfield.

Apropos my earlier post on the pani puri, I did manage to plop some puchkas down my maw. Awesome! Especially when the server kept plunging his dirty stubby fingers in the heavenly soup of pungent tamarind water. Meanwhile IFCI has cantered up. I wrote about it 3 months back on 05Jul’10 and while there does not seem to be any clarity around the digital event regarding its banking foray, the long term resistance has been broken and people are talking about it reaching the 90s pretty soon. I guess I’ll wait and watch for some time.

Portrait of a Portfolio – I

I have been managing an equity portfolio for someone since the past 5 – 6 years. While the returns over the past 6 years or so have been just about acceptable (CAGR of 17%), not much advance planning went into it. Of course, I do spend a lot of time in assessing and worrying about the positions (mostly direct equity longs) but there were no targets or goals till the beginning of the current calendar year. I can be quite cavalier about my money and take risks and yet not lose an iota of sleep even if I end up deeply and irrevocably in red. I once remember dunking 50% of one of my annual bonuses on a stock only to see it dropping 80% in value in the months to come. That was some years back and I still flinch whenever I come across that company’s name again. I had done almost everything wrong in that trade. I now always keep a printout of the chart (see the grotesque graphic above) of that trade at hand to serve as a grim reminder. I’ve not repeated that mistake yet. A set of scathing and self berating doodles are annotated on the chart and a bit more mature post mortem occupies its place of pride in my trading journal.

But it was my money and I had no qualms in losing it. With someone else’s money however, the game is completely different. There is a lot of responsibility and fear when you realise that the person has reposed not just his/her funds, but his/her trust in you. I do not know if professional fund managers think like this. They should, in my opinion. Recently there was talk of allowing the National Pension Scheme (NPS) to invest a small portion of its funds in the equity markets. The logic is impeccable – domestic, sticky money can be routed to the ever hungry infrastructure sector and its reliance on Foreign Domestic Investment (FDI) can thus be reduced. Point to note being that the country has not done too well in terms of attracting FDI this year. The Foreign Institution Investments (FII) that have been propping up the local markets to dizzying heights are not the same as FDI. I think everyone agrees that there is a Schwarzenegger sized opportunity in India’s infrastructure sector. I guess obstinacy and arrogance have stalled that move. Or is it could be that a similar sense of heightened anxiety and responsibility over playing with the public’s money is keeping the boring pension funds away from the capital markets? Bull!

Coming back to this portfolio that I manage: the advent of 2010 saw all the stock market experts proclaim the new year to be range bound and choppy. All surprisingly chorused that stock specific action could not be ruled out however. Given the avalanche of such advise, I decided, for the first time to have a calendar year end target for the portfolio. The return expectations being very sensible (15% per annum), my target therefore is to grow the portfolio by 17.65% between the period 1Jan’10 to 31Dec’10. Given the range bound prognosis of the local experts, I realised that frequent trading by booking short term gains and doing this a multiple times over will be key to reaching the target. Since we pay 15% as short term capital gains tax on equity profits, the 15% target was scaled up to 17.65%. This translates to a tiny 1.364% per month. Easy? That’s what you think! Not my experience really. Brokerage charges were not considered – but these would be offset by the fact that there would be some (non taxable) long term gains and that the effective tax outgo would be less than 15% of the net gain since some interim short term losses would certainly be available to set off against a part of the short term gains.

The chart on the right shows how I have fared in managing that chunk of money.  The solid green line scripts the movement of the portfolio value while the red line is the NIFTY. The light green bars climbing up from the x-axis depict the cash position in the portfolio. As you can see, luckily for me, I went all in just at the start of Sep’10 – just before the current climb began! Mostly in frontline counters. The light blue line is the monthly cumulative target line and as you can see I’ve crossed the target (represented by the faint dashed horizontal line at the top of the chart) already. I crossed it on 5Oct’10 with 87 calendar days to spare! So what should I do? Get out of it all, stay in cash and spend the remainder of the year with a big grin plastered on my mug planning and plotting the CY’11 strategy? Hardly. Interesting days lie ahead and much remains to be done. But I’ll feel awful if I dip below the blue line again. Since this time around there would be no FIIs to pull me out. The big mistake for me this time around happened during the onset of May’10. While the NIFTY fell c 8% – 9% during this time, this particular portfolio fell 12% – 13%. The additional delta was on account of a large long call on the NIFTY. And that hurt, I got numbed and I just let theta take control and it was game over very quickly. The only saving grace was that, unlike the earlier blunder of mine (mentioned above; on my own money), a lot of market participants got suckered and lost a lot of money in May this year. So, I had August company.

I’m worried about what will happen to this portfolio for the remainder of the year. A lot of public issues are going to hit the Indian capital market scene very soon and they are expected to suck out money from the ring. The canary is expected to sing loudly in the coal mines this winter. And then a quick round of profit booking by the FIIs cannot be ruled out. The street also looks divided on whether the Reserve Bank of India (RBI) will affect another round of rate hikes. I guess the market will wait for some times for the results to start hitting the newsreels and then whatever will happen will happen. But yes, I will definitely post about how I fared during the first week of next year!


I person I knew, much younger to me, full of life and with a very cheerful countenance and always helping of others expired some hours ago. I am in no mood to write anything. Pushing forward what I was to write today by another 3 days.

I did book profit on two positions today, but the transactions were devoid of any emotion.

The genius of Jim Morrison keeps coming back to mind. When he had cleverly swapped words around in a poem to create what was not his swan song, but probably the last of his own that he heard before he ….

This is the end, my friend only the end


This is the end, my only friend, the end

Jim’s “The End”, probably his best song was recorded in a dark studio with just one lone lit candle serving as the focal point for the right atmosphere.

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