'Singh is King': Markets dance to Manmohan's tune

The markets had bottmed out at around 12,500 on the sensex. They were only waiting for the trigger to launch an upmove (or some might like to label it as a bear market rally). And not one but two positive events, that occured simultaneously, have taken the markets into a new orbit. One was the softening of crude oil and the icing on the cake was the passing of the trust vote by Manmohan Singh Govt. The markets seem to be in a hurry to reach 15,500 on the sensex, and that is likely to be acheived easily. But what after that?

We may be in for a positive surprise on the upside. But that should not be taken as as opportunity to buy into the market. The macro fundamentals do not indicate a sustained upmove. Falling oil prices and the perceived stability of the Govt. can be triggers for the bull run. But buying, if any, has to be done selectively from a long term perspective. Many speculative stocks have moved up 20-40% in a short span (a few ADAG companies do not merit such rich valuations, example RNRL). It is better to book profits here and move to frontline bluechip stocks. The result season is on, and the performance analysis should be done before buying a scrip. The sectors that look good for a further 10% upmove are Banking & finance, Oil & gas PSU's and Power equipment & power utility companies.

Those investors who have missed the bus, by not entering the markets at 13,000 levels should resist entering the market now. Because the risk-reward ratio will become less attractive with every upmove in the markets. Ultimately, ugly politics will soon raise its head to puncture the rally. Rather, it would be a good opportunity to book selective profits at the levels of 16000-16500 on the sensex and 4800-5000 on the NIFTY.

Politics rules the bourses: Investor's dilemma

Last week Crude Oil prices plummetted, and our markets celebrated the news with style. The smart recovery may be shortlived, as the markets are likely to be hit by a political turmoil soon.

What unfolded as a trust vote on the 'Nuclear Deal' has been converted into a mistrust vote by our selfish politicians. We might see the PM Dr. Manmohan Singh drive to Rashtrapati Bhavan in the evening of 22nd July 2008 to submit his resignation, maybe followed by instalation of Mayawati as the next PM thereafter. Even if the Govt. survives, its functioning is likely to be paralized in the wake of the likely price to be paid to the saviours of the Govt. This does not auger well for the stock markets in the near to medium term i.e. upto the next gerneral elections. Politics will henceforth rule the markets, and we all know the lows to which our politicians can stoop to fulfill their vested interests. In all probability economics is likely to take a backseat.

The uncertainty in the political arena is likely to lead to extreme volatility on the bourses. Even long term investors need to prepare themselves for this eventuality. How can an investor survive this poltical crises/turmoil? Firstly, it is prudent to prune exposure to equity and partly shift to debt. Secondly, improve the liquidity by holding sufficient cash to encash on the ensuing volatility. With BSE at around 13,500 and Nifty at 4,100 (closing prices on 18th July), there is a possibility of short term movements of 15% or more either way: BSE 11,500 or so on the downside and 15,500 on the upside. If the Govt. survives the rise in the markets may be used to partly book profits/ losses. And if the Govt. fails to win the trust vote, the panic reaction should be taken as an opportunity to buy bluechips for long term. Remember: cash is the king in such a situation.

John Templeton: Global Investment Guru.

John Templeton, the global investment guru and a philanthropist died recently at the age of 95. His pioneering effort the Templeton growth Fund, founded in 1954 in the USA, has given a compounded annual growth rate of 13.5% to its investors. He sold this fund to Franklin Resources Inc. on his 80th birthday in 1992. Templeton in his book 'Engines that move markets' published in 2002 wrote: "We must remain patient, flexible in our outlook, and always aware that all securities and assets will be priced according to their future earnings".

Templeton's '16 rules of investment success', reproduced below, are relevant for a long term investment strategy:

1. If you begin with a prayer, you can think more clearly and make fewer mistakes.
2. Outperforming the market is a difficult task. The challenge is not simply making better investment decisions than the average investor. The real challenge is making investment decisions that are better than those of the professionals who manage the big institutions.
3. Invest - don't trade or speculate. The stock market is not a casino, but if you move in and out of stocks every time they move a point or two, the market will be your casino. And you may lose eventually --or frequently.
4. Buy value, not market trends or the economic outlook. Ultimately, it is the individual stocks that determine the market, not vice versa. Individual stocks can rise in a bear market and fall in a bull market. So buy individual stocks, not the market trend or the economic outlook.
5. When buying stocks, search for bargains among quality stocks. Determining quality in a stock is like reviewing a restaurant. You don't expect it to be 100% perfect, but before it gets three or four stars you want it to be superior.
6. Buy low. So simple in concept. So difficult in execution. When prices are high, a lot of investors are buying a lot of stocks. Prices are low when demand is low. Investors have pulled back, people are discouraged and pessimistic. But if you buy the same securities everyone else is buying, you'll have the same results as everyone else. By definition you can't outperform the market.
7. There's no free lunch. Never invest on sentiment. Never invest solely in a tip. You would be surprised how many investors do exactly this. Unfortunately there is something compelling about a tip. Its very nature suggests inside information, a way to turn a fast profit.
8. Do your homework, or hire wise experts to help you. People will tell you: investigate before you invest. Listen to them. Study companies to learn what makes them succesful.
9. Diversify - by company, by industry. In stocks and bonds, there is safety in numbers. No matter how careful you are, you can neither predict nor control the future. So you must diversify.
10. Invest for maximum total real return. This means the return after taxes and inflation. This is the only rational objective for most long-term investors.
11. Learn from your mistakes. The only way to avoid mistakes is not to invest - which is the biggest mistake of all. So forgive yourself for errors and certainly don't try to recoup losses by taking bigger risks. Instead, turn each mistake into a learning experience.
12. Aggressively monitor your investments. Remember no investment is forever. Expect and react to change. And there are no stocks that you can buy and forget. Being relaxed doesn't mean being complacent.
13. An investor who has all the answers doesn't even understand the questions. A cocksure approach to investing will lead, probably sooner than later, to disappointment if not outright disaster. The wise investor recognises that success is a process of continually seeking answers to new questions.
14. Remain flexible and open-minded about types of investment. There are times to buy blue-chip stocks, cyclical stocks, and convertible bonds, and there are times to sit on cash. The fact is there is no one kind of investment that is always best.
15. Don't panic. Sometimes you won't have sold when everyone else is selling, and you will be caught in a market crash. Don't rush to sell the next day. Instead, study your portfolio. If you can't find more attractive stocks, hold on to what you have.
16. Do not be fearful or negative too often. There will, of course, be corrections, perhaps even crashes. But over time our studies indicate, stocks do go up ….and up … and up. In this century or the next, it's still "Buy low, sell high."

The World Energy Crises: India's dilemma

Oil is on the boil, commodity prices are at astronomical levels. The blame game is on. Who is responsible for this mess? Will the bubble burst soon? Indian economy is reeling amidst the global turmoil, leading the stock market into a tailspin. It is a global phenamenon, and its ramifications are much wider. Analysts are predicting crude prices to rise to 180-200 $ per barrel. Inflation indeces are steadily rising. The stock markets are worried because they discount the future.

According to 'Dr. Doom' Marc Faber it is natural that commodity prices to move inversly to stock prices, a phenemenon being witnessed currently. Essentially higher commodity prices lead to higher inflation which is bad for stock prices, and results in movement of hot money from stocks into commodities. However, the period between 2004-07 witnessed stock prices and commodity prices moving up simultaneuosly. The period 2001-02 witnessed depressed stock and commodity prices. According to Marc Faber it is easy to contain inflation through a loose monetary policy when commodity prices are low. The rise in commodity prices has been fuelled by the high growth asian economies (China & India). So this time the monetary policy of low interest rates followed by US Fed was counter productive in controlling inflation. RBI also delayed tightening measures till inflation reached double figures.

Finally, the FinMin and RBI have conceeded to the fact that some growth will have to be sacrificed for controlling the spiralling inflation. Protecting the growth in demand at this juncture might come at the cost of our fiscal deficit going out of control. India, as compared to China, does not have the option of a loose fiscal policy to counter the high interest rates. So corporate growth is bound to be hit negatively. But this does not mark the end of the 'India Growth story'. The rising rates of savings and investment in India will ensure that the growth vehicle is not derailed in the long run.

In the long run, India needs to look towards alternative sources of energy, to ensure 'Energy security' for the growing economy. Apart from Solar energy, Wind enrgy, Hydro power India must exploit the use of nuclear energy to tide over the energy crises. The recent move by the Govt. seeking ratification of Indo-US Nuclear pact is a step in the right direction. With the high crude prices these alternative sources of energy have now turned more cost effective and hence need to be harnessed to their full potential.

Now, coming to the important issue of the 'Crude Oil bubble'. Oil price rise has been contributed primarily by the speculative activity in oil futures, which has been admitted by FOMC. With the slowdown of global economy, the prices will soften sooner than later, and maybe in 6-8 months time we might see crude oil trading under $100 per barrel.

So, what lies in store for stock market investors? The markets which were predicted to rise to 17000-18000 level on BSE in 2007 surprised everyone by rising to iver 21000 in January 2008. The expectation now is BSE sensex going to 10000 levels, but the markets may yet again surprise the market pundits. A temporary bottom seems to have been made last week at sensex level of 12800 ( NIFTY 3850), and the markets would now be guided by the Ist quarter results, which are likely to provide a positive bounce. It is definitely a time to build a long term portfolio of bluechips.

The clock turns full circle: where do we go from here?

There are a lot of differences in the situation prevailing at the beginning of January 2008 and the end of June 2008.

In January the stock markets were in euphoria, breaking new records everday on the upside. Liquidity was driving the markets mad despite the unearthing of the US subprime crises. Analysts and Brokerages were predicting sensex levels of 25000 and above in the short term. Rupee was holding strong against the dollar and the predictions were af rupee appreciating to Rs36/ dollar by the end of 2008. Everyone was bullish on the growth prospects of Indian economy. The index of Market optimism was more than 90%, that means 90 out of 100 people beleived in pumping money into Indian equity. Even then there were 10% of the people who beleived that fundamentals of the markets were not supporting the overall optimism, so they were selling in the markets. They may have been branded as fools, because they may seem to have lost the oppotunity in the short term. These minority stakeholders must be a smiling lot today. Things changed dramatically within a span of a few days and the markets came crashing down by over 20%.

Today, in June 2008 the situation is reverse. Everybody is talking about the equity markets with a negative bias. The market continues to fall despite the growth prospects of Indian markets remain fairly optimistic. The market is flooded with negative news. The rupee is being predicted to depreciate to Rs45/dollar by the end of the year. The index of Market optimism is down to 10%, that is 90% of the stakeholders are running away from the markets, even at the cost of booking huge losses. It's again those 10% of the people who beleive that the valuations of the market have become exteremely attractive, and they are buying selectively inti 'Blue Chips'. In the short run the market may go down further, making them look foolish, but these will be the paople who will have the last laugh 6 months from now.

However, there is one similarity in the situation prevailing in the beginning of January 2008 and now. Both the situations point to a trend reversal. While January 2008 siganalled the end of the bull phase, June 2008 is likely pointing towards the end of the bear phase in Indian markets. Just one good news can change the fortunes of the markets. It could be the decline in oil prices to the level of US$ 100/barel. It may seem wishful thinking, but it is very likely to happen with the liquidity tightening measues initiated by Asian Central banks.

Its time to decide whether you belong to the 10% tribe, or will like to go with the majority opinion. Remember 'Fortune favours the Brave'.

How to survive in choppy markets

Anyone who has seen the one way movement in the markets for most part of calender 2007 is perplexed at the choppy behaviour of Indian stock market eversince the beginning of 2008. As most investors are governed by strong emotions, it is very diificult to survive the choppy markets. If we do not develop the survival instincts we will tend to loose huge money in this uncertain environment.

What went wrong with the 'India growth story'? Overseas fund managers have withdrawn more than US$3 billion during the first three months of 2008. The adverse turn of events on the global economic front are partially responsible for this turmoil. Emerging markets are grappling with higher inflation as the commodity prices have risen to new highs. Crude prices hitting new highs is a double whammy for net importers like India: High oil prices coupled with the falling rupee is putting pressure on the fiscal deficit of the govt. The falling rupee has also increased the risk aversion of FII's vis-a-vis India, because they find better opportunities elsewhere for the time being. There is a reasonable consensus among analysts for a slowdown in Indian GDP growth to between 7-7.5% this fiscal.

The individual investor is caught at the crossroads, baffled and bruised. For those who have invested for long term it is a time to forget looking at the indeces for a while and relax. Things will start to improve within the next 4-6 months. For the active investors it is time to do some portfolio churning. Everytime there is a change in the economic fundamentals, different sectors take the lead on the markets. The performing sectors of 2007 like infrastucture, power media and reality have become laggards, and the laggards of the last bull run like Pharma, FMCG and Technology have taken over the leadership mantle. The sensex has fallen about 25% in 2008 till date, but sectors like capital goods (infrastructure, power etc.) have declined over 40%, whereas media sector has declined by over 40%. On the other hand Pharma has given a growth of 14%, and returns on FMCG and IT sectors have been marginally negative.

So it can be seen from this data that we can survive bad patches in the markets by following the principle of portfolio churning.

Benjamin Graham: Lessons in Value Investing

• Benjamin Graham has been called the father of 'Value Investing'. Several Investors, including the legendry Warren Buffet have benefitted immensly from his visionary investment techniques. Benjamin Graham believed that each security has an intrinsic worth that is recognised by the market in the long run. Here are famous qoutes from Benjamin Graham's 'Art of Value Investing':
  
  * The secret of sound investment can be summed up in three words: "Margin of safety"

* Investors should treat themselves as 'Owners of a business' rather than owners of a stock quotation, so focus should be on the underlying soundness of business.

* If you are sure that the markets are too high, it is better to keep your money in cash or Govt. Bonds rather than put it in 'Bargain stocks'.

* It is a great practical mistake to waste time on 'Forecasting the markets'.
Emotional decisions should not be allowed to overrule the market fundamentals. Market gives ample opportunities to buy good stocks at the right price.

* When beggers and shoeshine boys tell you how to get rich, don't be under the illusion that one can get something for nothing. This has been proven right several times in the past: during the US stock market crash of 1929, Harshad Mehta scam of the 1980's and again the recent stock market crash of January 2008. Yet public memory is too short, so we tend to repeat the same mistakes time and again.

Graham's investments mainly focussed on bargain stocks based on earnings potential or asset values. For this one needs to scan the balance sheets of the companies. Currently, with the markets in turmoil due to global oil crises and rising inflation, offer many such bargain buys. One just needs sometime to look at their balance sheets (most of the companies have already declared their annual results).