India Morning Report: And here’s how we do not make a bubble?

sinbadThe run in IT stocks , sudden and abrupt also might be a harbinger of not so good tidings as stupid money, unusually attributed to ingenuous retail investors in the Indian markets by experts ( of for my juniors, it is culturally appropriate to attribute to senior experts) , rushes in. It is nevertheless a cultural folly (run retail investors are coming) that is the Indian quirk bringing the need for caution into play faster than others. However Puts have moved on their markers as well from 6800 which lost 800k in OI yesterday to 7000 which gained 550k, making the Ringconfidence indicator at 70% (RingConfidence=OIaddinmidpointofnewrange/OIaddinmidpointofoldrange, just invented here) give us confidence in the rally having moved on with speed, but also rising too fast even as market Vols fell 20% on Monday itself to 30% on the India VIX. The rise is probably the result of a market segment trying to accelerate profit taking in the markets, earlier expected to be at the end of 2014. The usual rollover ringConfidence for example in the period since 2004 has been 59-63% highly unsatisfactory in my personal opinion but perhaps more pragmatic than the usually faster optiions track where traders having doubled down and not found the markets expensive, are already in waiting with 7100 sold puts gaining currency overnight

Not only will the market thus become cautious over today, it will probably chew (not eschew) on the additional inflows in the markets now till the DIIs go back to being net buyers, having taken a slice out yesterday ( INR 6 Bln) Given a mix of caution and optimism, this could improbably not unlikely, try to extend the market range on the Nifty and the Sensex further at least for end 2014 if due pragmatism lasts, and may thus keep rising if it is possible without IT. IT sector at this point is under threat from the stronger currency and though markets are trying to replicate an earlier era’s confidence in face of a strengthening currency, a complete superimposition of 2004 is likely seen as foolhardy and will be beaten down esp if market is seen as ripe for profittaking in the real rally scrips , in the cyclical sectors. The Euro’s weakness and new stimulus may have driven buoyancy in sentiment on the IT crowd, but the same is also not sustainable, barely enough to take the bulwark sector out of the dumps, not for a new surge of growth as Infy’s public spectacle of restructuring management is emulated by others in rebadging units and recent acquisitions non eof them including HCL creating real new business in the past few quarters and after due consolidation below par compared to the nineties, still living the Java era long past.

PSU banks and DRL proved that bad earnings stories will remain part and parcel of the market fabric, the let down from PNB and BOB sharp and while PNB suffered for making late provisions, with profits down 30%, it also failed with new restructuring worth INR 44 Bln and slippages of nearly INR 20 Bln in a single quarter. PNB’s Gross NPAs are now 5.2% while BOB has reduced Gross NPAs to under 3% stemming the rot even as both PSY biggies reported less than lukewarm Net Interest Income growth from loans. PNB has not sold any of its burgeoning bad assets to ARCONs while BOB has sold INR3.94 Bln this quarter with more to come. both banks will likely be supported by large recoveries as well as the market environment improves.

However bad earnings are unlikely to be tolerated by the markets, even for BOB with a 10% growth in income or nearly flat profits not a sign of good business and private banks will continue to rerate the PSU companions out ont he Banknifty which has nearly peaked as expected at 14300 levels albeit for a breather.

The coming budget among other new policy pronouncements will likely see a rechristening of new welfare schemes to replace the UPA deals. Banks and cyclicals will likely strengthen their leads in the market post budget ( and post the 2014 World Cup in Rio) Bharti and ITC thus seem perfect candidates to get ou tof the defensive clutch slow track as the revoery numbers come in.

Power NBFCs seem to be getting a tad over optimistic but may be duly rewarded with the budget focussing on low hanging fruit in infrastructure. However, a real rally is likely to ensue in IDFC, Relinfra and JP Associates, with GMR, GVK and these three depending on new financing options to deleverage their current balance sheet.

DRL’s performance is unlikely to weigh down on the sectors performance which is still underpriced given the real domestic market opportunity and the flip out from the continuing patent crossovers into generics thru 2016

Currency and Bond markets will continue buoyancuy when markets open at 9 AM, with other Asian markets also getting into recovery mode post elections and in the case of Japan, discounting the coming El Nino, also important for India’s agri-economy

Again it is improbable but not unlikely that markets hit 7500 on Friday itself before counting is over. If you are still looking for hugely mispriced opportunities looking at India much like Russia and Poland of the eighties and nineties, you can probably just wait for Maruti to hit 2200-2300 whence it would be a delicious short with SBI. Maruti has apparently started down and so even if you like me have not been tracking the stock you can get in on shorts, though the overall market remains positive through today and tomorrow, the ubiquitous A-D line going 3:1 on this slow day.

GolBoot (GoldmanSachs) has sold its stake in M&M felling the puppet’s streak, while Kotak is celebrating a probably unactioned and filed Nayak report recommending banks be incorporated in the Companies Act, allowing it not pare its stake as PSU banks ignore the report recommending a NOHFC structure not unlike the Chinese Huijin with govt stake below 50% and age limits for CEOs and WTDs in Banks both public and private.

Immediately, though the error margin mentioned in the various exit polls is larger, it will not likely be a harbinger of uncertainty but more for the mascency of the science in India, their will also be post noise and due scandal on cooked figures no more than is the ritual commonplace in established research markets like the USA. Did you know even Global Beer sales have no record before 1992 and thus the data’s margin of error remains bigger and unwieldy allowing for science to be inspired by personalities and perspicacious commentary. Equally improbable, and yet not unlikely, is a flare up in Oil prices, as the tab starts ticking up , threatening to jeopardise the fiscal balance with the new government eager to show down the performance  of the UPA though the continuing increase in Diesel prices is great news.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s