Are we done yet?

We are now at a 31 month high for the NIFTY (@ 5590 therabouts)!

And my mood is getting to be optimistically cautious. It surfaces immediately in my latest tweet which in turn was inspired by the recent tweet from Clifford Alvares, an Outlook Money correspondent.

Clifford Alvares Tell-tale signs of the next downturn: Slow-down in daily FII figures; market PE of 24+; unjustified run in small-caps — and free lunches. 5:50 PM Sep 6th via web Retweeted by you

Most of the people tracking and working the markets will be cautiously optimistic now, but I’m a worm. And worms have no spine. It’s getting to be a cacophony of dire predictions and upbeat prophecies. The more one reads and listens and watches, the more confusing it gets. But if you dont read or listen or watch, you might as well invest using your keen sense of smell or touch, maybe. Thats puts a weird thought in the wormy head. I am thinking of taking a leaf out of Curtis Faith‘s “Way of the Turtle“, where two stock market professionals recruited a couple of dozen bright men and women with no prior experience of trading and transformed them into star traders in two weeks flat (or maybe more). The basic premise being that trading is a skill that can be learnt just like any other academic/vocational course and that traders are made not born. So, what I’m going to do is recruit a dozen sharp blind men and women. Then as study material I’m going to give them thousands of historical stock charts converted into 3d, beveling up the stock price movement lines and make them trace their fingers on the line. The charts would run only upto certain arbitrarily chosen past points in time but I would urge my blind charges to carry on the “momentum” of their fingers….the future path which  the fingers take will be compared against actual historical movements and feedback will be provided….. if this experiment of mine ever gets done, then my hypothesis that blind people can make the best technical investors can be tested. Maybe this personal blind worm method of forecasting will work for me. I’ll write a book, become hugely famous and after a hundred years, people will falsely believe that the phrase “momentum investing” was coined off the tips of blind star traders.

The reason for this lunatic ambling within moving average envelopes is that expert opinions are certainly not helping:

The New York Times carries a story telling us all that the cloud of a double dip recession seems to have passed us by while Nouriel Roubini chastises the US economy planners that we are now defenceless against the looming threat of a double dip. A year or so back, if you’d have mentioned double dip to me, I’d have visions of Taj Mahal tea bags and “dip dip dip, and it’s ready to sip. Do you want it stronger, then dip a little longer. Dip, dip, dip..and it’s ready to sip”. But that’s a triple dip – maybe a new challenge worthy for Roubini. But for now, everyone and her pet poodle is talking of double dips:

Double Dip: the pet food of your pet bears. “Dip, dip and it’s ready to slip. For teddy to be stronger, dip a little longer. Dip, dip…and it’s ready to slip”.

I felt that this interview of the equity analyst, Sangeeta Purushottam dispensed some sane advice. It seems to say that there could be money waiting on the sidelines and it could come pouring in taking our local markets to euphoric heights. But the premise operating here is that there is indeed money waiting on the sidelines. Is there? A browse through global investing sites does not indicate a clamour to invest in the much discovered Asian bourses. Indeed, for all that noise about the NIFTY reaching it’s 31 month high, this country performance table by The Bespoke Investment Group is quite educative and humbling. But then the presses in the USA are printing and printing and printing. Strange things can happen.

So I crawled the SEBI website to ferret out FII net flows into Indian equity over time.  I left out derivative data and picked data representing the FIIs’ stock exchange investments and primary market data only. I think the chart speaks for itself. The main question however remains unanswered: is there is more cash coming India’s way via the FII route for the remainder of the year (net inflows)? Since Jan’10, c 60,000 crores of rupees have come into Indian markets via the FII direct participation in equity. Logic dictates that we should definitely get in more for the remainder of the 115 calendar days left in 2010. However, I noticed that typically there are 3 months (modal frequency) that see net FII withdrawals from the equity markets. We have seen two down months this year (January and May) – is a third one coming? So money will definitely be made, euphoria or not, but it calls for nimble trading and investing. That to me is a big problem since I am a worm after all. Any advise will be greatly appreciated.

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Sugar me baby

Sugar me baby, NOT.

The problem with too much of a fixation on charts is that we sometimes tend to ignore their non causality. Past patterns may not repeat. Just because a stock is at its 52 week low/high does not automatically mean that it will start rising/falling. In fact, quite the opposite. Momentum surfers say that, if accompanied by strong volumes a rising tide is likely to rise further and a sinking ship is bound to plunge deeper. Trouble is that we amateurs tend to sell too early (“too much of greed is not good”) or hold on to falling lines sliding further. That is what I had in mind when I said (here and here) that its not important when you buy – when you sell is what determines your worth. Another category of misadventures has to do with those with blood on their hands as they attempt to catch falling knives. Many look at a 6m or 1yr chart, and buy into a stock if they see that its fallen quite sharply. These are  people hopping onto a slide midway in the hope that the slide will magically metamorphise into a roller coaster and take them up. While they lose lesser than the ones who have been around at the top before the slide, it hits the ego more. Guys who have been losing money on a losing investment for some time seem have turned accepting to the fact that they have hit a rough patch and bravely ignore  further losses. Guys who get in fresh in the middle of a drop have to brace themselves for the stock market equivalent of a tight slap.

If there’s some sudden, extraneous shock (the PIIGs dominoing themselves to bankruptcy, terrorist strikes, political events, my turning up to work in pink  corduroys, et al) then it can help to get in during sudden drops. Else, it’s not so simple. Better bet would be good stocks that have done nothing and might be on the verge of a breakout. See the chart of Reliance Industries Limited (RIL), for instance – there has been a reconcilation between the brothers, global energy stocks are firming up, entry into communications and power…but the RIL stock has been sleeping.

On the other hand, one sector that has definitely turned quite bitter of late is sugar. Take a look at the chart alongside – while the NIFTY has done a handsome 23%, the sugar stocks have fallen from 12% – 32% during the past 12 months. EID Parry has trumped the NIFTY though to return a nice 46%, but then only 65% of EID Parry is sugar. Now, I do remember a colleague of mine buying into one such sugar producer and losing quite a bit in the bargain. Not a sweet deal at all. Same has been the case with Airtel. A couple of people I know bought into the leading telco, drawn by its image and brand name hoping for a quick rebound. But the rebound has not come about and they are still ringing up losing numbers.

Food is not good here in India. The stomach turns to see so many people going hungry only to realise that mountains of rice are allowed to rot in the Food Corporation of India’s (FCI) godowns.  The Indus Valley civilization taught us to build granaries but somewhere down the line we forgot how to manage them. Its pointless to blame Mr. Sharad Pawar since he is, by his own admission, quite overworked. I am not quite sure what role the food ministry mandarins have played in the local sugar mandis, but the the picture looks bleak for these cane crushers.

Sugarcane is quite a popular crop back there in my village. Its yield per acre is high since these grasses can be planted quite close to each other. Its almost impossible to venture deeper into the growth since the stems are quite stubborn and the rough leaves do scratch and irritate the skin. Wild boars gorge themselves on the canes and I remember my cousins/uncle/labourers taking turns watching over the farm under the starry skies.  Later in the morning it was always a pleasure to watch a village belle walking around, with unkempt hair digging her incisors and tearing into the outer skin of a sugarcane stump with a beautiful ferocity that can now be matched with the savage manner in which some investors have been mauled into losses over these stocks.

Sometime back there was a shortage of cane since there were many takers. There was talk of ethanol doping of fuel, the liquor companies where in attendance too, the gur producers and of course the sugar refiners. As a kid, I remember seeing serpentine queues of bullock carts laden with sugarcane waiting to offload their ware at the local sugarcane factory. I am not sure if you know but sugarcane needs to be processed immediately upon harvesting, else the sugar content declines rapidly. But a year or so back, we heard of millers coming directly down to the farms to collect the produce. This is a cyclical stock and once you see such un-natural behaviour (home pickup), it is almost sure that the good times are about to turn.

The heady demand drove up cane prices and the sugar producers had to stock up on inventory procured at very high costs. They are still holding on to these stocks. Since sugar prices are coming down now, the sugar companies have no option but to eat this cost. Further, since the Indian monsoon seems to be ok ok this year, there will be fresh produce coming into the sugar mandis later this year. Which will cause prices to fall even more. Also, there is a wide acceptance of the fact that the RBI might increase domestic interest rates. I do not know offhand, how much debt is carried by the sugar producers, but if they indeed do – then its one more nail into the coffin. Domestic brokerages have thumbed the sector down – many are predicting a 30% – 50% drop in quarterly profits.

Only deregulation of the sector can spike up the sector. But one wonders why talk of deregulation always surfaces when the sector underperforms. It is again a digital event, not in one’s control – and with Mr. Sharad Pawar overwhelmed with work, this is one coin flip which we’d rather ignore. These are cyclical stocks – roller coasters, ferris wheels, etc. Lets have them increase their P/Es first and then look at investing in them. Depressed earnings of cyclicals reduce the denominator of the P/E ratios and therefore they become attractive when their P/Es are high.

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