Infosys Pay Hikes

With most Indian IT companies announcing wage hikes, it seems quite clear that the moribund economy has impacted pay hikes at most companies. It turns out that the various HR consultancies were off target by around 2% in their general predictions. Infosys has announced a 8% avergage hike this year coming on the back of a 6% – 8% hike in Oct’12. Wipro has said it’s paying up it’s employees by 6% – 8% this year; reports about TCS put it’s hike in the wide 5% – 10% band. Mid tier Mindtree may come in at 6% (same as last year?). Cognizant seems to have deffered hikes to July so that all employees across rank and file get wage hikes at the same time. I also read somewhere that IBM is not doling out any hikes this year! So the scenario is quite bleak and suddenly IT does not seem to be the hot sector that it was made out to be. Unless of course if you happen to be an IT worker seconded overseas. The recent weakness of the INR has effectively increased the value of such folks’ USD holdings by approximately a tenth!

Given this theme, a good part of my last weekend was spent in reading up assorted news stories about wage hikes reported in Indian media. On a lark, I also tried to collect historical mentions of wage hikes at Infosys (long considered by many to be the darling of the Indian IT scene) and since I try to correlate anything with everything, I tried to see how the decisions by the top brass at Infosys regarding this extermely crucial element of their cost have stacked up against their company’s share price over the past few years. As mentioned earlier, the data for the chart below has been collected from old media reports (all of them online) and as hard as I tried, I could not get the average hikes at Infosys for FY’04 and FY’05. If you know, please let me know. So, with wage hike data from FY’06 onwards, the chart below superimposes the salary hikes at Infosys over it’s share price. The share price has obviously been adjusted for the two very generous bonus issues on the stock, but it has not been adjusted for the various dividend payouts on the stock. I don’t know if you can see it, but to my “force fit a pattern where none exists” eye, I can discern a weak correlation between average hikes and the share price! And I can also see a distict lag effect between the time when the insiders (i.e. employees) feel the pinch vs. when the market drops the price!

Infy salaries trend

KSE 100 Rocking!!

It seems that Indian and global (read ‘developed’) markets have finally de-coupled – a theme that people used to talk about immediately post the financial crises. This decoupling means that the US markets are rising and the Indian indices are heading lower!! In fact it is the whole emerging markets bunch that is feeling the heat and some people feel that there is more pain to come. It was this post here that inspired this entry of mine. As you can see in the attached, the BRICS bellwether indices are languishing in the bottom quartile of all the countries tracked there. Interestingly, whenever I have seen similar country stock market return rankings, I always remember seeing Pakistan amongst the top. That piqued my interest and I did some digging around a few days back to test a hypothesis that had formed: since the Pakistani market may not be deep enough, and since it is very volatile therefore perhaps it may have dropped much more than the Indian market post the 2008 crisis. The recovery, therefore, would be higher in percentage terms as compared to India. Pakistan also has inflation. It is perceived by many to be politically more unstable than India. So what’s making FIIs pump money into Pakistan (and Phillippines, etc) on one hand and vaccuum it out of India (and other large EM markets)? What is it about Pakistan bourses that makes hot money go there ignoring the seductive siren song of rising yields in the US? Surely it cannot be asset allocation based weight correction. It doesn’t seem to be an expectation of political stability either. Perhaps it is a feeling that the market is undervalued on a relative basis. Relative to what? The emerging basket? It’s neighbours (India, China & Russia)? Or it’s past? Whatever the answer, I kept coming back to my hypothesis. So some downloads from Karachi Stock Exchange and the NSE and some number crunching/charting yielding the following perspectives:

KSE vs NIFTY historical

Parabolas are very scary. It seems as if of late the KSE 100 is rising us as if KSE 100 = A x t squared. where t = time. Now parabolas require massive amounts of energy to sustain themselves. In the context of the stock market, more money needs to be continuously pumped in for every unit of time elapsed. According to me, if the KSE 100 and it’s ilk form your scene, it’s time to short.

KSE vs NIFTY historical normalized

More Pain?

Too many people are expecting a correction in the S&P 500 these days signalling the end of a very handsome rally. The chart below (from Yahoo!Finance) compares weekly price movements of the NIFTY, the iShares MCSI Emerging Markets Index (in $s) and the S&P 500 over the past 4 years. The NIFTY and the S&P 500 have both returned around 90% over the last 4 years while the MSCI EM Index is much lower at a 64% gain. Interestingly, the NIFTY appears just slightly more volatile than the S&P 500 – visually, at least.

MCSI EM Index vs NIFTY vs SP500

Would that dunk the desi stocks? I know its too early to take a punt but I have done just that – gone long on the NIFTY ETF. I should have looked at the weekly chart too – that may have held me back perhaps. The chart below on the left shows the past 18m daily NIFTY party – support around 5600, 200 DMA, RSI almost touching 30, etc. So I bought the market. Post purchase dissonance ensued and when I looked at the weekly chart, I was like errrrr….while 5600 still looks supportive, there’s still some space between the latest weekly close and the 50 DMA and the RSI of the weekly does have room to fall further. 😦 Too many of the initiated, unsinged, un-unlucky investors ignore the advice of the weekly and the monthly charts. Will do a post one of these days digging deeper into the ‘lazy charts’ as I dub them to be.

NIFTY daily 25Mar13NIFTY weekly 25Mar13

CPI or WPI?

Back after a really long gap. I was training to be part of the first team of astronauts from India to Mars. I failed to make the cut so am back now on this website. Only to discover that all my money that was parked in midcaps has all but disappeared while I was away! I should have made that trip, I now regret my failing the entrance tests. Isn’t it true that Mars is the ruling planet of all midcaps? fiery, combative and volatile. mangal ho sabka!

The other big news is that the lady that’s our household help is hoping to be a leg up over inflation and has therefore delivered a verbal notice (in Telugu) for a generous increase in her wages. Since we don’t understand Telugu, that’s what we understood her point to be. Surely, she follows the other Andhra gentleman who is also the RBI guv, who seems quite sure that dipping the repo isn’t really going to get general prices down. He means ‘consumer’ prices. If you remember, the earlier technicality was to do with whether inflation is ‘supply side’ or ‘demand driven’. RBI said supply side constraints were pushing up prices. Point being that an increase in production capacity and productivity would bring prices down. On the other hand, the finance ministry seemed to have said all along that tweaking the monetary levers would push prices down – a reduction in rates would get investment and spending cycle going and therefore Mumbai should reduce the repo rates. Now, the debate has shifted to which rate should one look at. The RBI guv points to the stubborn consumer prices and demands that the government of the day do some serious belt tightening while Delhi points out the recent decline in prices in the mandis and thereby makes a stronger case for rate cuts going forward.

So is it the wholesale prices (tracked by the WPI) or the prices that end consumers pay (tracked by the CPI) should one follow? The answer surely cannot be the very Indian, “it depends” since, after all, economic policy and long term planning (as also salary revisions!) depend on the rate chosen. Most countries use the CPI and have dropped the WPI from their economic planning game since the seventies. The RBI is proposing we pay more attention at the CPI and make that our official inflation rate instead of the WPI. It’s said that since the CPI tracks movement in prices at the ‘point of sale’ that is really what matters to a country’s citizens. General public cannot buy at mandis at wholesale prices. So therefore, lets change our official inflation gauge to CPI instead of being one the few countries (Pakistan gives us company) that remain fixated on the WPI. Personally, I feel that the WPI serves us well. We are predominantly an export driven economy. The other industrialized nations have made the transition to being completely consumer driven industries. So they track consumer price level changes. What is confusing to me is China’s decision to move away from WPI in favour of the CPI like the industrialized nations – I personally think it is very much an export driven producer economy (bigger version of India) and the consumer culture has not yet set in there.

CPI vs WPIIt’s really funny – in 2008, when the CPI in India was way lower (7%) than the WPI (12%), people (i.e. industry lobbies) were pointing to the high CPI and asking for a rate cut. Now they are pointing to the WPI and still asking for rate cuts. This led me to read up articles on the net to check if there is some cyclicality, causality or inter-dependence between the WPI and the CPI. The reason why the WPI and CPI are not moving in step is easy to understand – just look at the constituents of the indices to figure it out. There’s no rocket science or great economic mumbo-jumbo when the Prime Minister says that the food costs are running ahead of all else – more so, those of the protein based foods. Core CPI (ex food and fuel) has really dropped from 10.5% (in Jan’12) to 8% (in Jan’13) – so it’s pretty obvious that the reason why the CPI as a whole is still ruling at 10.5% is because of food and fuel. The weightage of food and fuel is very different across the WPI and CPI. The weights of the items that form the CPI basket are derived from their share in a typical consuming household. So things like imports and exports and wastage and storage (remember food stocks piled up in FCI godowns?) become critical factors that can make end buyer prices very different from producer prices. At a very general level, does it not mean that WPI + supply chain related affects = CPI? You get the idea, right? So I did two things – I looked up the internet and also plotted CPI and WPI values over the past 7 years to check if any patterns or correlation exists. Take a look at this paper which says that in India, the WPI leads the CPI. It points out that the WPI seems to be predicated by market forces and that controlling the factors affecting WPI can give a lever to controlling the prices at the consumer level. India’s per capita income, though low, is increasing and the nation’s consumption basket is slowly shifting towards non-core food items and hence despite the high weightage of food items in the CPI, it is unable to lead the WPI to a greater extent. So, while the paper does point to the presence of bi-direction causality, the impact of the WPI on the CPI is higher than that of the latter on the former. Also, WPI leads CPI which makes it the leading indicator of consumer prices and therefore eligible as a inflation planning gauge in the Indian context.

Should Gentlemen Prefer Bonds?

There is this fixed income theme playing in my contrarian head since some time and I did some priliminary reading over the past few days to figure it out. The hike in diesel will surely stoke inflation, but much depends on how the INR will behave as the US Fed goes about mopping mortage securities from the US market. The USD has already started depcreciating post the QE3 announcement. The JPY will also join the party now that the central bank of Japan has also announced their own mop up act. Yes, the fact is that global events will always have a much higher impact on the landed cost of fuel (huge component of inflation) than the price cuts announced. It is perhaps because of this ‘imported inflation’ that the RBI chose not to dunk their policy rates (repo) despite the industry clamouring for it like a starving mongrel. Ergo yields remain high and the hypothesis that once the policy rates get lowered (step wise), fixed income trading positions will profit is still yet to be proven.

Peter Lynch’s quote comes to mind:

When yields on long term Government bonds exceed the dividend yield on the S&P 500 by 6% or more, sell your stocks and buy bonds.

Now, I don’t know how much of this still applies in the US markets as of today, let alone India but the chart below shows the historical trend of the dividend yield of the NIFTY over the past 13 years or so.

 

The 10 yr GoI bond yield has been moving in a range bound manner since the start of last calendar yield (see chart below from Bloombeg). It is around 8.18% these days. So, Lynch’s above equation evaluates to 8.18% – 1.48% = 6.7% > 6%.

But then yet another quote from Peter Lynch comes to mind and makes me all confused as ever:

Gentlemen who prefer bonds don’t know what they are missing

Sigh!

What a Fearless Squeeze!

Here’s another view to add to the bleak chorus doing the rounds of dalal steet these days. While the retail rats are sitting out of the game, traders and speculators havr it none too easy themselves. The market’s been on a steady contraction in volatility as seen by the falling Hi-Lo range of the NIFTY ever since the day it peaked towards end 2007. The 50 day moing average of the Hi-Lo range of the NIFTY shows a clear secular downtrend. Less scope for day traders to play in.

Consequently, the fear index on the NIFTY itself has been falling rapidly since the date data is available. While the VIX is poised to reach its lowest levels ever, there isn’t anything positive in the newsroom to suggest a surge. Maybe the VIX will continue to fall below 15? It’s lowest reading was on 6Sep’10 (15.22) and the friday reading of 15.73 is in striking distance! The market had jumped up 13% in the two months following 6Sep’10.

Commodity Casino

Here’s an interesting chart (showing ytd commodity returns) originally published by DB and being tagged around by bloggers. Metals, crude and shipping are down. Shipping is down big time really. Is this chart positive for India? Looks like it if you look at the increasing demand for thermal coal from India in the second chart on the right. The heat wave continues here in the US and I wonder if this may inject the much needed inflation in the US economy?

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