Morning Trekk

Thursday, 21 November 2013

Volume 2 Issue 7
Visit us at http://www.investrekk.com

Whatever goes around comes around

Dear Mr. Modi, on a rather simplistic analysis of the present economic conditions we could reasonably trace the roots of some of the malaise to economic crisis of late 1990s and early 2000s when incidentally NDA government was in power. We acknowledge that asking NDA government to share some of the blame for current inflation, corruption, unemployment and slower economic growth etc. might sound preposterous to many. But in our view a sustainable solution could only be provided if the root cause of the problem is identified properly. The economy was substantially opened up during economic crisis of late 1990s and early 2000s (exacerbated by economic sanctions post nuclear blast in May 1998). For example, regulations in sectors like coal, power, roads, telecom etc. were liberalized substantially. Selective land, labor & tax reforms were sought to be introduced through SEZ scheme. Financial sector regulations were liberalized to attract greater foreign flows. This was incidentally the period when the global liquidity taps were opened to full flow. This was also the time when China entered WTO and got a license to flood Indian markets with its cheap manufactured goods.- .Read more Market outlook The market has regained the momentum it lost post Diwali and appear set to break out of its sideways trend. However, a convincing close outside 59106310 range would only confirm a directional trend. A break out of the current neutral range, shall take Nifty to 5750 or 6700 level in no time. The risk reward at the current level is however neutral. .........read more More inside Markets overnight What we found interesting in global news What we found interesting in local news

Vijay K. Gaba +91-22-24036039 [email protected] Thought for the day Don't fight forces, use them. R. Buckminster Fuller (American, 18951983)

Word of the day Inexorable (adj) Firm; determined; unyielding; unchangeable; inflexible; relentless.
(Source: Dictionary.com)

Shri Nrada Uvca Package for Sugar Industry in UP, package for Bihar, 50% cheaper electricity in Delhi, G-Sec yields above 9%, INR back to 63/USD levels everyone seems to be attacking P. Chidambarams red lines with vengeance!

This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person. Readers should seek financial advice regarding the appropriateness of investing in financial instruments and implementing investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. InvesTrekk Global Research (P) Limited does not provide portfolio management, stock broking or any other fund based service. The model portfolios mentioned in this report are merely to illustrate the investment style and strategy recommended in the present times. Please refer to the important disclosures at the end of this report. Copyright 2012 InvesTrekk Global Research (P) Limited. All rights reserved. InvesTrekk Trekking the path less travelled and InvesTrekk are trademarks of InvesTrekk Global Research (P) Limited.

21 November 2013

Also read: Letter to Mr. Narendra Modi

Whatever goes around comes around

Dear Mr. Modi, on a rather simplistic analysis of the present economic conditions we could reasonably trace the roots of some of the malaise to economic crisis of late 1990s and early 2000s when incidentally NDA government was in power. We acknowledge that asking NDA government to share some of the blame for current inflation, corruption, unemployment and slower economic growth etc. might sound preposterous to many. But in our view a sustainable solution could only be provided if the root cause of the problem is identified properly. The economy was substantially opened up during economic crisis of late 1990s and early 2000s (exacerbated by economic sanctions post nuclear blast in May 1998). For example, regulations in sectors like coal, power, roads, telecom etc. were liberalized substantially. Selective land, labor & tax reforms were sought to be introduced through SEZ scheme. Financial sector regulations were liberalized to attract greater foreign flows. This was incidentally the period when the global liquidity taps were opened to full flow. This was also the time when China entered WTO and got a license to flood Indian markets with its cheap manufactured goods. Y2K led global ITeS boom, easy credit led private investment surge, Cheap Chinese import led consumer spending and massive government spend on infrastructure funded by public sector and deficit financing created a mirage of India shining. Unfortunately the higher income-higher consumption and savings-higher investment effect of all this reflected in data with a lag during early years of UPA I regime (2004-2007). The real problem however is that all this liberalization, investment etc. was done (a) without creating any conceptual framework; (b) without instituting adequate and appropriate institutional and regulatory framework; (c) without addressing sustainability concerns; and (d) without making appropriate financial viability study. Some of the consequences are(a) Rampant corruption in public offices, as allocation of liberalized national resources to private parties was left mostly at the discretion of politicians; (b) Widespread obstructions and delays in execution of mega projects as these projects conflicted with the sustainability objective and environmental concerns; (c) Advancement of future investment demand impeding financial viability of projects and creating massive stress in financial system; (d) Decimation of domestic SME and household sectors which could not compete with cheap Chinese imports leading to structural pressure on currency; current account and general employment level; (e) Unmanageable rise in aspirations of youth population leading to substantial changes in consumption patterns and thus pressuring household savings and consumer prices; (f) Sharp rise in rural land prices making food inflation a structural problem. To continue 2

21 November 2013

Markets overnight
Chg Chg %

India equities Indian equities corrected sharply, led by financials. Market breadth was marginally negative at 4:5. Volatility was higher. Volumes were close to average. Commodities outperformed the benchmark indices. Coal India, Sesa Sterlite, Tata Power, and ACC were only Nifty gainers. Banks and media sectors notable underperformed. ICICI Bank, JPA, BPCL, Hindlaco and IndusInd Bank were top Nifty losers. Global equities US stocks dropped, sending the Standard & Poors 500 Index to a third day of losses. This morning Asian stocks fell, with the benchmark regonal index on course to drop for a third day, after minutes from the U.S. Federal Reserves last meeting signaled U.S. stimulus may be reduced in coming months. India currency and debt Indian 10yr benchmark yields were higher at 9.05%. Indian rupee depreciated to 62.58/USD level. On Tuesday short term overnight market volumes were lower at Rs1072.78bn with call money rate at 8.70%. LAF repo outstanding was lower at Rs407.70bn. Global debt US Treasury 10-year yields rose to the highest level in two months as Federal Reserve officials said they might reduce $85 billion in monthly bond purchases in coming months as the economy improves, minutes of their last meeting show. German government bonds dropped for a second day amid speculation euro-area growth is gathering pace, damping demand for the safety of fixed-income assets. Global currencies The euro remained lower following its steepest decline in three weeks as investors weigh speculation on more stimulus measures from the European Central Bank before a speech by President Mario Draghi today. The pound strengthened to a three- week high against the dollar as speculation the Bank of England will raise its benchmark interest rate earlier than it forecast spurred demand for the U.K. currency. Global Commodities West Texas Intermediate fell for a second day as investors weighed a possible easing of economic stimulus in the U.S., the worlds biggest oil consumer. Copper in London advanced for the first time in three days. Palm Oil declined for a third day to the lowest level in more than a week as global production of soybeans and sunflower seeds may climb to a record, boosting cooking oil supplies.

NIFTY NIFTY Fut CNX Midcap Sensex NSE VIX

6123 6149 7670 20635 20.83

(1.31) (1.32) 0.68 (1.24) 7.35

GOI 10yr yld INRUSD

9.040 62.58

0.22 0.32

S&P500 FTSE100 STOXX50 Nikkei225

1781 6681 3047 15076

(0.39) (0.25) (0.07) (0.34)

US10yr yld Ger10yr yld Japan10yr yld

2.81 1.71 0.61

2.85 (0.58) 0.00

EURUSD USDJPY DXY

1.342 100.45 81.05

(1.04) 0.36 0.54

CRB Index WTI Fut ($/bbl) Cu Fut ($/lb) Gold Fut ($/oz) Silver Fut ($/oz)

273 93.63 316 1246 19.92

0.37 0.09 (0.32) (2.25) (2.26)

Source: Bloomberg, BSE, NSE, RBI

21 November 2013

Market outlook and strategy for today

5 things that will make us bullish on market: (a) Final clearance for implementation of GST from April 2015. (b) Fall in inflation to RBI acceptable range of 6%. (c) A sharp fall in NIFTY to below 5250 level led by banks. (d) Sharp sustainable fall in global energy prices. (e) A truly coalition government at the center post election. Broad market direction The market has regained the momentum it lost post Diwali and appear set to break out of its sideways trend. However, a convincing close outside 59106310 range would only confirm a directional trend. A break out of the current neutral range, shall take Nifty to 5750 or 6700 level in no time. The risk reward at the current level is however neutral. We expect more action in mid and small cap arena in next few months. We continue to suggest that in this phase investors must restructure equity portfolios by (a) rationalizing portfolios by exiting low quality small and midcaps and (b) rationalizing weight of commodities and financials in portfolio where these are overweight. The PSU stocks are gaining maximum momentum in this rally. Most of the beaten down stocks appear poised for a smart up move. We would however encourage investors to avoid these stocks for investment purposes. It is important to note that this rally is akin to IT rally of 1999-2000 and abundant credit rally of 2007. It is not backed by economic fundamentals in any part of the world and hence least likely to sustain in little longer time frame. This cycle like the previous will be shallow, limited, and unsustainable. The reversal therefore could be much sharper and deeper. It is important to note that the losses in 2001-02 and 2008-09 were at least 5x the gains made in the preceding rally. While it may sound a ridiculous to miss this alluring opportunity to make some quick money, we would caution that all trading positions must be created and held with strict stop loss. Strategy (a) Avoid leverage. Gradually complete deployment of equity allocation over next 6months. Overweight consumers (auto, FMCG, telecom and pharma), tier-II ITeS, and unleveraged large capital goods. (b) Create aggressive trading shorts only when Nifty appears closing convincingly below 5910 level. (c) Buy MNCs like Cummins, Siemens, United Spirits, Bosch, Bayer Crop (d) Hold all long trading position with strict stop loss of 1%. (e) Avoid commodities and PSUs from mid to long term perspective. (f) (f) Keep cash only in very short term debt. Avoid longer duration debt. Create positional short in USDINR with 2-3year horizon. (g) Gradually build trading position in gold with 15-18months perspective

21 November 2013

Morning walk through the woods

Fed committed to easy policy for as long as needed: Bernanke Federal Reserve Chairman Ben Bernanke said on Tuesday the Fed will maintain ultra-easy U.S. monetary policy for as long as needed and will only begin to taper bond buying once it is assured that labor market improvements would continue. In a speech to the National Economists Club that echoed dovish comments by his nominated successor, Janet Yellen, Bernanke also said that while the economy had made significant progress, it was still far from where officials wanted it to be. "The FOMC remains committed to maintaining highly accommodative policies for as long as they are needed," he said in prepared remarks, referring to the policy-setting Federal Open Market Committee. "I agree with the sentiment, expressed by my colleague Janet Yellen at her testimony last week, that the surest path to a more normal approach to monetary policy is to do all we can today to promote a more robust recovery," he said. President Barack Obama nominated Yellen, the Fed's current vice chair, to replace Bernanke when his terms ends on January 31. The Senate Banking Committee, which held a hearing for Yellen last week, will vote on her nomination on Thursday to pass it to the full Senate for consideration. She is expected to win confirmation with relative ease. The Fed has held interest rates near zero since late 2008 and quadrupled its balance sheet to $3.9 trillion through three massive rounds of bond buying. It decided in October to maintain asset purchases at an $85 billion monthly pace. Bernanke, in remarks likely to reinforce expectations the Fed will not taper until next year, said officials want evidence of durable job growth before scaling back buying. "The FOMC still expects that labor market conditions will continue to improve and that inflation will move toward the 2 percent objective over the medium term. If these views are supported by incoming information, the FOMC will likely begin to moderate the pace of purchases," he said. (Reuters) More signs of Japan rebound Japan's exports rose a stronger-than-expected 18.6 percent in October from a year before, notching up the fastest gain in over three years thanks to the weak yen and a pick-up in overseas demand, data on Wednesday showed. The rise compared with an 11.5 percent increase in September and market expectations in a Reuters poll for a 16.5 percent gain. The data is the latest sign of a recovery in the world's third biggest economy, with economists saying that strength in exports to the U.S. and China, Japan's biggest trading partners, was particularly positive. Exports to China soared an annual 21.3 percent in October, while exports to the U.S. were up 26.4 percent. (CNBC) 5

21 November 2013 Coal seen as new tobacco sparking investor backlash About $8 trillion of known coal reserves lie beneath the earths surface. The companies planning to mine and burn them are being targeted by a growing group of investors concerned with the greenhouse gases that will be made. Storebrand ASA, which manages $74 billion of assets from Norway, sold out of 24 coal and oil-sands companies since July including Peabody Energy Corp., the largest U.S. coal producer, citing a desire to cut fossil-fuel industry holdings. This month Norways opposition Labour Party proposed banning the countrys $800 billion sovereign wealth fund from coal investments. Maybe weve hit some kind of nerve in the debate, Christine Torklep Meisingset, Storebrands head of sustainable investments in Oslo, said by telephone. Hopefully, other investors will be acting along the same lines. There could be an interesting parallel to tobacco. The movement is an offshoot of a campaign by more than 70 investors to pressure all fossil-fuel industries on climate change. It harks to the 1990s antitobacco push and is gaining help from unlikely partners. The International Energy Agency, a 28-nation group promoting energy security, is lobbying increasingly to limit the release of heat-trapping gases. Investors make decisions everyday on buying and selling stock and were confident that the strong long-term outlook for coal and Peabodys specific investment appeal will carry the day, Vic Svec, a spokesman for Peabody Energy, said yesterday by phone. Coal has been the fastest-growing major fuel around the world for the past decade and is expected to surpass oil as the worlds largest energy source. (Bloomberg) US retail sales beat forecasts, point to firming growth A gauge of U.S. consumer spending rose more than expected in October as households bought a range of goods, suggesting upside momentum in the economy early in the fourth quarter. The Commerce Department said on Wednesday retail sales excluding automobiles, gasoline and building materials increased 0.5 percent last month after advancing 0.3 percent in September. Economists polled by Reuters had expected so-called core sales, which correspond most closely with the consumer spending component of gross domestic product, to rise 0.3 percent. The better-than-expected increase in core retail sales suggested consumer spending would likely accelerate from a two-year low touched in the third quarter and probably limit downside risks to economic growth during the fourth quarter. Core sales last month were bolstered by sturdy gains in receipts at clothing, furniture, electronics and sporting goods shops, among others. Sales at electronics and appliance stores rose by the most since April, suggesting a residual boost from the introduction of Apple's new iPhone the previous month. Sales at auto and parts dealers rebounded 1.3 percent. (Reuters) 6

21 November 2013

Events in our back yard

Moily Says India may lift price controls over diesel in 6months India will likely free up diesel pricing from government controls over the next six months with gradual price increases, Oil Minister Veerappa Moily said Wednesday. Currently, state-run fuel retailers sell diesel at state-fixed discounted rates. Earlier this year, the government allowed them to increase the price by about half a rupee each month as part of a plan to gradually remove the subsidies given on the fuel. Still, the companies sell each liter of diesel at a loss of about nine rupees ($0.14), Mr. Moily told reporters. But that is significantly lower compared with a loss of 14 rupees earlier this year, he added. Mr. Moily's comments indicate the government may take new measures to eliminate subsidies in the coming months, such as allowing the companies to increase the price by a bigger margin every month. Such a move would help improve the government's finances as the South Asian nation spends billions of dollars each year to subsidize the fuel. It would also help the retailers as the government doesn't fully compensate them for their revenue loss, and state-run oil producers who currently need to give deep discounts on the crude oil they supply to state-run refiners. The government stopped fixing the price of gasoline in June 2010. Increasing the price of diesel at this time will be tricky for the government with general elections just a few months away. Higher diesel prices will fan inflation. Also, the fuel is used by farmers, who form a big chunk of voters in India, to run their water pumps to irrigate crops. (WSJ) DTC may be introduced in winter session As per Finance ministry sources it finalising the official amendments to Direct Taxes Code (DTC) Bill so that it could be taken up in the Winter Session of Parliament beginning December 5. Among other things, the DTC Bill proposes a higher income tax rate of 35%. While the Bill proposes to keep exemption limit at Rs 2 lakh for individual tax unchanged, it proposes to introduce a fourth slab of 35% tax rate for those with an annual income of over Rs 10 crore. It also proposes to levy a 10% tax on dividend income of more than Rs 1 crore. Besides, Minimum Alternate Tax (MAT) may be levied on book profit and not on gross assets, sources said. Further, the Securities Transaction Tax (STT) is likely to be retained, though the Standing Committee on Finance, which had scrutinised the bill, had suggested abolition of the levy. At present, tax is levied on income between Rs 2-5 lakh at 10%, Rs 5-10 lakh at 20%, and above Rs 10 lakh at 30%. Further, those earning more than Rs 1 crore have to pay a surcharge of 10%. The Finance Ministry, according to sources, had accepted most of the recommendations of the Standing Committee. (BS) 7

21 November 2013 Sugar companies' shares surge on government aid hopes Shares in sugar companies surge on hopes a government committee headed by Farm Minister Sharad Pawar may decide on Wednesday to announce financial assistance for struggling sugar mills as well as an increase in import duties on raw sugar to halt cheaper imports and strengthen domestic prices. Bajaj Hindusthan Ltd , Shree Renuka Sugars Ltd and Balrampur Chini Mills Ltd gained 8-16%. (Reuters) Ahluwalia seeks import parity price for coal Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission, on Wednesday said that the prices of indigenously mined coal should be aligned to global market to prevent distortion in the energy market in India. We should try to align the domestic coal price to international. Even if you do not do that, the coal prices would certainly go up...And that is an important issue that we have to face, Ahluwalia said, while addressing KPMG Energy Conclave in New Delhi. The Deputy Chairman said that the recent decision of passing on the higher cost of imported coal to consumers is an absolutely unavoidable move. Because of the cheaper domestic supply, the demand is more and it is distorting the market. We solve that problem by ultimately pooling of coal, he said. According to Ahluwalia, Indian coal is priced much below that of imported coal. And gradually, the country is becoming more dependent on imported coal. This results in deviation of electricity, as some sectors face much higher tariff, he said. (BL) Multiplex operators strike gold For a country that produces twice as many movies a year as Hollywood, India has a problem that's making cinema theatre operators beam: a shortage of modern multi-screen cinemas and plenty of increasingly affluent film fans. Multiplex operators like PVR Ltd, Inox Leisure, Reliance Mediaworks and Mexican chain Cinepolis are scrambling to set up theatres targeting the rapidly growing number of middle-class Indians willing to pay to watch Bollywood movies in more comfortable surroundings. These plush theatres, often in big city shopping malls, are a far cry from the single-screen cinemas most Indians still frequent and which range from huge, purpose-built halls to sheds where the deluxe seats are wooden benches. The potential is huge, provided operators can find the right location in a country where prime urban real estate is costly and in short supply. Multiplexes account for just 8 percent of India's 12,000 screens but rake in a third of total box office receipts, according to the Single Screen Association of India and a report by consultants KPMG and the Federation of Indian Chambers of Commerce and Industry (FICCI). (Reuters) 8

21 November 2013

Important disclosures
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