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?

Rolling 200 Day Returns: NIFTY

I recently constructed this chart which shows the rolling 200 (calendar) day returns if one had just passively invested in the NIFTY over the last 10 years or so. As you can see this has been one heck of a ride. The unlucky ones were those who caught the first massive correction which happened post Jul’08 – this first red trough would have applied to investments done during the Jul’07 – Jul’08 period. similarly the second red trough pertains to investments done during the Sep’10 to Jul’11 period. There is a little flutter of green appearing towards the end. Hopefully, this will cause another sustained period of green for the next 12 months or so to come. Looking at the peak 200 day returns of >90% one wonders if we will ever see such kind of exuberance ever in the near future…

NSE – Falling Volumes

I fiddled around with the historical trading data on NSE and plotted the following graphs. The first chart (red line chart)shows the average daily turnover rising in recent months.

So while the turnover is increasing, this is accompanied by a very secular decrease in the average trade size. I am confused by the second chart really (brown line). According to this plot, the average trade size has been falling continuously since 2001 and is today around Rs 20,000. Does that mean more retail participation in the cash segment? But anecdotes point otherwise.

The 3rd chart I prepared shows the number of individual trades per month (blue line) and that finally shows a story which seems consistent with the times. The number of trades per month have definitely trended down in last 2 years.  In fact, in Indian stock markets, the daily number of transactions may be a better proxy of information than the total number of shares traded or the total value of shares traded. This also seems to be consistent with the view that is expressed in this research paper which concludes that in emerging markets, “the state of development of the market does not allow instantaneuous information dissemination”.

I am sure all that means lower revenues for institutions whose earnings are proportional to trading activity. Is that the reason why the BSE website shows ads via the google banner? To make up via “other income”, what they might not by transaction fees? I seriously doubt if any other noted stock exchange in the world shows banner ads. Also, how does one look at the fact that some of the products that may be getting peddled on the bse website billboard may actually belong to companies listed on the exchange itself! I am not a legal expert, but curious to know if that may be interpreted as a breach of impartiality?

 

 

 

NSE Advances vs Declines

Here are two plots – the first is the daily breadth of the NSE listed stocks (the A/D ratio). The A/D line is at it near lowest since the past 12 months with the benchmark index also moving in the same lock and step with the A/D line. This chart is from http://icharts.in and I was too lazy to plot the broader market indices (other than NIFTY) but even then the NIFTY superimposition on the NSE A/D line does seem to point to some trend reversal in the days to come.

 

The second chart shows the monthly A/D ratio for all NSE stocks. The months which had more stocks falling are shown as red negative columns. The chart is more red than green despite the NIFTY having returned 236% during the same period which represents a gain of 10.9% compounded per annum. I guess this hints at the quality of listings on the NSE. The action is always in the frontline stocks – not that you needed a chart to reveal that! But maybe the visual might serve its purpose if it makes you pause and rethink any decision of yours that may be asking you to throw money on small, unloved, thinly traded and operator driven stocks.

Petrol on a Roll

Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once unthinkable dosages will almost certainly bring on unwelcome after-effects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.
Warren Buffet

I did some number crunching and came up with the chart on the right. It shows the movement of the price of a liter of petrol in INR (stepped blue line) vs. it’s price in equivalent dollar terms (red line) over the past 10 years. The price of petrol in equivalent USD terms has always been  higher than the local retail price except during Jan – Feb ’09. Petrol pricing strategy seems to rely on ‘fixing’ the retail price of the fuel so as to minimise the tracking error against the red line. I constructed this chart to test this exact same hypothesis – point being that the red line is indicative of what the Indian refiners have to pay, in USD, for buying crude oil from the international markets. The blue line is obviously indicative of the revenue they get when they sell it to Amar, Akbar and Anthony. So the gap between the red line and blue line essentially indicates the subsidy burden that the Indian economy and therefore what AAA (the three gentlemen above) have to bear via taxes.

Also, between the INR:USD exchange rate and the petrol price, the latter is the dependent variable, i.e. exchange rate causes petrol price policy. This also comes out through the tracking movement of the blue line vis-a-vis the red line in the chart above. I doubt if all get this – many think that recent petrol price hike will help arrest the recent fall of the INR. Well, nothing like that happened today. Most people also think that the RBI can intervene to control the INR. The fact is that the INR fx market is too large for the RBI to control anymore. We are living in very different times from 10 years ago [ref: these excellent articles by Ajay Shah. click here and here].

Now, what’s interesting with this recent hike is that it has happened at a time when the global price of Brent crude has been in a continuous fall since April this year! So India has increased its retail petrol prices despite a near 20% drop in the global price of oil! Reason being that while global crude oil prices fell by 20%, the INR dropped a similar amount in the same time thereby negating any benefits that could have accrued due to a lower oil import bill.

Also wanted to jot down the observation that the quantum of the recent blue line spike (i.e. price hike) is very high indeed. Maybe the Government had anticipated massive opposition to the move and hiked a lot so that they can roll back a partial amount to appease the insulted. Or it could be that Finance Ministry is seeing the INR go down to 60 soon and therefore have announced a one time whopper of an increase. I do not know what’s behind me but my chart certainly points to an anomaly – i.e. the blue line troucing the blue line by such a wide margin – perhaps for the first time in the past 10 years. Whatever be the explanation, the chart makes it quite clear that we live in exceptional times today and that all manner of caution and discretion is advised especially when allocation your capital to your ideas.

Incidentally, I am wondering if I should increase my ‘work from home’ days given that the price of petrol in Hyderabad has risen from 65.15 (16Jan’11) to 80.58 (24May’12) representing a 17% annualized increase. The only two major cities where petrol is more expensive than Hyderabad are Jallandhar (80.68) and Bangalore (81.01). Petrol remains lowest in Goa at 68.51, but even there, as in all Indian cities, beer is cheaper than petrol!! Cheers.

State Bank of India

Look who’s come with a pile of cash at the State Bank of India’s ATM! Have they started selling/issuing shares through ATMs/

I am right behind this lucky guy lining up at the same ATM. But me, being more niggardly than this fellow will wait for a price level of 1600 to enter the ATM. Doesn’t look like we’ll see that price being offered, but again, there’s no harm in waiting and hoping. The least that can happen is that my wait will yield nothing. These days, I am ok with that. 🙂

Global Commodity Prices and the INR

The $CRB index gives global price levels of a basket of commodities and is an important indicator that is watched to get clues on whats happening. The index has been declining of late and this would certainly seem to benefit countries like India that have a whopping oil (and gold!) import bill. However, the INR seems to be playing spoilsport. Any gains from a drop in global commodity prices seems to be getting undone by a concomitant drop in the INR. I constructed the below chart to figure out the relative movement of the $CRB and the INR:USD exchange rate. The correlation comes to a high -0.75.

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