Morning Trekk

Monday, 16 December 2013

Volume 2 Issue 23
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2014 - War continues

The post Lehman period has seen an intense war between the forces of Greed and Fear in the global financial and political fields. So far most of the battles have been won by Fear. Potent fears of yet another collapse, mostly kept investors under check. The torrents of liquidity emitted by central banks in US, EU and Japan did occasionally come to aid of Greedy, but were found generally inadequate. In 2013 however, for the first time since 2008, Greed appeared to be having a winning edge. The forces of Fear, as we write this today, appear to have exhausted most of their ammunition, e.g., EU disintegration, Grexit, PIGS default, hyper-inflation resulting from the Mints printing money incessantly, Iran reneging, Currency war erupting and endangering emerging economies, hard landing of Chinese economy, etc. Whereas the forces of Greed have got fresh batch of ammunition stable job market in US, housing boom in UK and US, stable financial markets in EU, stronger USD, Chinese growth crawling up, moderate or no inflation, US financials back in business, lower commodity prices, US energy revolution, and mostly stable & peaceful conditions in hot beds.Read more Market outlook We expect the market to see higher momentum in next couple of weeks. The volatility may rise substantially in coming days. The volumes may see an upsurge should the momentum spill to mid and small cap arena. Overall we do not expect any sustainable up move in markets till May 2014. Nifty faces strong resistance in 6600-6700 range. Further tightening by RBI, renewed tapering talks and another budget stalemate in US could spoil the party. A close below 6150 would push Nifty back in neutral territory (5850-6300 with occasional violation on either side). In our view this is more likely scenario for January-April 2014 period...........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 investrekk@gmail.com Thought for the day The Chinese seemed to be mourning Mao in a heartfelt fashion. But I wondered how many of their tears were genuine. People had practiced acting to such a degree that they confused it with their true feelings. -Jung Chang (British, 1952 -) Word of the day Repast (n) Something taken as food; a meal.
(Source: Dictionary.com)

Shri Nrada Uvca Will Rajan preempt any pre-poll fiscal indulgence by hiking 50bps upfront?

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.

16 December 2013

2014 - War continues

If you can look into the seeds of time, And say which grain will grow, and which will not, Speak. Shakespeare, Banquo Scene III, Act I, Macbeth The post Lehman period has seen an intense war between the forces of Greed and Fear in the global financial and political fields. So far most of the battles have been won by Fear. Potent fears of yet another collapse, mostly kept investors under check. The torrents of liquidity emitted by central banks in US, EU and Japan did occasionally come to aid of Greedy, but were found generally inadequate. In 2013 however, for the first time since 2008, Greed appeared to be having a winning edge. The forces of Fear, as we write this today, appear to have exhausted most of their ammunition, e.g., EU disintegration, Grexit, PIGS default, hyper-inflation resulting from the Mints printing money incessantly, Iran reneging, Currency war erupting and endangering emerging economies, hard landing of Chinese economy, etc. Whereas the forces of Greed have got fresh batch of ammunition stable job market in US, housing boom in UK and US, stable financial markets in EU, stronger USD, Chinese growth crawling up, moderate or no inflation, US financials back in business, lower commodity prices, US energy revolution, and mostly stable & peaceful conditions in hot beds like Pakistan, Afghanistan, Iraq, Iran, Libya, Yemen, Sri Lanka (except smaller pockets like Syria). The only immediate hope for the forces of Fear is a disorderly withdrawal of monetary injection by US Federal Reserve. Failing this 2014 may also belong to the Greedy ones. It will not be before 2015 when further reinforcement for the Fearful arrives the inflationary impact of QE may begin to appear on the horizon, US Fed begins to talk about tightening rates, EU and BoJ achieve their inflation targets and talk about moderating liquidity, US completely withdraws from Asia and a war for supremacy and control ensues between Asian forces, Emerging economies are challenged by inflation, trade imbalances created by US energy boom and stronger USD, etc. Many battles of this ongoing global war have been fought in India too. Indian politicians have mostly sided with the Fearful, providing them with enough ammunition and food to survive. The Greedy ones have been supported by the global forces (FIIs), who have provided enough supplies to keep the hope afloat. Most Indian investors have watched this intense battle from the sidelines so far. The miniscule participation, if at all, had been from the side of Fearful. However, since September 2013, when a new General (Narendra Modi) took charge of the forces of Greed in India, the domestic Indian participants have been rather ambivalent. Some of them have actively joined the Global network of Greedy, but most are still undecided. In next few days, we will make an SWOT analysis of the forces of Greed and Fear as they are positioned in Indian markets, and suggest what would be an appropriate strategy for the Indian investors.

16 December 2013

Markets overnight
Chg Chg %

India equities Benchmark indices completely retraced back to the pre-poll results level, ending the week at November close level. Volumes were close to average. Volatility continues to be moderate. Market breadth was poor at 1:3. Auto, IT and FMCG sectors were relative outperformers. Tata Motors, Wipro, M&M, Coal India, Tata Steel were top Nifty gainers. Banks and infra sectors were notable underperformers. JPA, BHEL, ICICI Bank, UltraTech and IndusInd Bank were top Nifty losers. Global equities U.S. stocks were little changed, capping the worst week for the Standard & Poors 500 Index since August, with losses in oil producers and phone shares offsetting gains after the House of Representatives passed a budget deal. Emerging-market stocks fell, capping a second weekly decline, as Samsung Electronics Co. paced a slump in technology companies. India currency and debt Indian 10yr benchmark yields were higher at 8.91%. Indian rupee depreciated to 62.13/USD level. On Friday short term overnight market volumes were higher at Rs1189.72bn with call money rate at 7.49%. LAF repo outstanding was lower at Rs436.08bn. Global debt Treasury five-year note yields rose for a fourth week, the longest stretch since September, as signals the economy is improving fueled bets a decision by the Federal Reserve to start cutting bond purchases may be imminent. Global currencies The yen rose from a five-year low versus the dollar amid speculation on the timing of a cut in the Federal Reserves $85 billion of monthly bond purchases. The pound fell for a third day versus the dollar on speculation its advance to a two-year high this week was overdone and as Bank of England Chief Economist Spencer Dale said interest rates will stay low. Global Commodities West Texas Intermediate crude dropped to the lowest level in 10 days as falling demand boosted fuel inventories and on concern that the Federal Reserve will curb stimulus. Futures fell 1.1 percent this week. Gold futures rose in New York after signs of low U.S. inflation indicated Federal Reserve policy makers meeting next week have more room to maintain their $85 billion of monthly bond purchases.

NIFTY NIFTY Fut CNX Midcap Sensex NSE VIX

6168 6198 7605 20716 17.84

(1.12) (1.08) (1.41) (1.01) 0.56

GOI 10yr yld INRUSD

8.910 62.13

0.67 0.48

S&P500 FTSE100 STOXX50 Nikkei225

1775 6440 2922 15403

(0.06) (0.08) (0.21) 0.40

US10yr yld Ger10yr yld Japan10yr yld

2.86 1.83 0.69

(0.35) (0.55) 2.90

EURUSD USDJPY DXY

1.374 103.21 80.21

(0.07) (0.31) (0.04)

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

280 96.60 331 1235 19.6

0.00 (0.79) 0.60 0.73 0.61

Source: Bloomberg, BSE, NSE, RBI

16 December 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 We expect the market to see higher momentum in next couple of weeks. The volatility may rise substantially in coming days. The volumes may see an upsurge should the momentum spill to mid and small cap arena. Overall we do not expect any sustainable up move in markets till May 2014. Nifty faces strong resistance in 6600-6700 range. Further tightening by RBI, renewed tapering talks and another budget stalemate in US could spoil the party. A close below 6150 would push Nifty back in neutral territory (5850-6300 with occasional violation on either side). In our view this is more likely scenario for January-April 2014 period. We expect much higher action in mid and small cap arena in next few weeks. 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 less likely to sustain in 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) Buy MNCs like Cummins, Siemens, USL, Bosch, Bayer Crop, Merck etc. (c) Initiate aggressive short positions between 6650-6700 Nifty levels. Financials and high beta midcaps would be best bets for short selling. (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. 4 (g) Gradually build trading position in gold with 15-18months perspective

16 December 2013

Morning walk through the woods

All eyes and ears on Fed this week Will the U.S. central bank now slow the pace of its stimulative bond buying as the economy's outlook begins to brighten or will it wait, setting the stage for stock investors' undreamed of gains to keep going? Fed policymakers gather for the last time in 2013 for a two-day meeting that concludes on Wednesday. Many investors are still expecting the Fed to delay scaling back its $85-billion-a-month bond buying program until early next year. But recent developments suggest a December move by the Fed is at least in the realm of possibilities. Those developments include a stronger-thanexpected November jobs report, a U.S. budget deal in Washington and the latest signs of tame inflation. A decision to begin scaling back quantitative easing now is "potentially the largest factor for the market in the near term," said Robert McIver, coportfolio manager of the Jensen Quality Growth Fund in Lake Oswego, Oregon. "The very thought of it has had a very negative reaction in the market," so a period of consolidation is likely to follow, he said. Indeed, stocks logged their worst week in nearly 4months this week. (Reuters) China ready with reformed IPO guidelines, IPOS to resume early next year China's securities regulators issued fresh details on their plans for the resumption of initial public offerings (IPOs) early next year, eliminating pricing and turnover controls for IPOs while detailing how investor participation will be managed. Beijing is moving to reinvigorate its stock markets to make them more responsive to market forces in order to help lessen Chinese firms' over dependence on bank loans for fundraising. Chinese investors frequently deride the stock markets as hives of speculation, manipulation and insider trading. The government must restore investor confidence in stocks as an asset class compared to other products like housing or wealth management products, and at the same time convince investors that corporate governance at listed Chinese firms is improving. The China Securities Regulatory Commission (CSRC) has already said it will abandon its approval-based listing system in which government officials decided which companies would get to list, and adopt a U.S.-style registration system in which the market decides reception and pricing of IPOs. Some 50 companies (out of a total queue of over 800 firms waiting to list) are expected to complete registration and auditing procedures in January, according to official statements, and will theoretically be able to list soon after. (Reuters) 5

16 December 2013 Do we have a gold bounce on cards? Gold could be set to bounce back in the beginning of 2014, as the overwhelmingly bearish sentiment in the market may present an appealing opportunity to get long the battered metal for a trade. "Next year could be a totally different picture for gold," said George Gero, precious metals strategist at RBC Capital Markets. He believes that improving fundamentals, plus a turnaround in sentiment, could finally put a bottom under the precious metal. "Every analyst I've been seeing or talking to in the past month has gotten pretty bearish because of the price action. And as open interest has shrunk along with the price, a lot of money has been allocated out of gold and to the stock market," Gero told CNBC.com. "There hasn't been too much inflation to make gold investors jump in at lower prices and bargain-hunt. But I believe that you could find some reallocation to gold next year, because the lack of inflation could be disappearing." Mark Dow, a former hedge fund manager whose bearish gold and silver calls have proven prescient, similarly believes that the precious metals have become ripe for a bounce. "Now is a really good time, risk-reward-wise, to put on a long gold or a long silver trade," Dow said on Thursday's "Futures Now." With gold near the year's low at $1,179, "you could see that the stops are nearby, and you could get a bounce to $1,400 or something along those lines, or maybe even more." Gold has declined by 26 percent year-to-date, as fears about inflation have not been borne out, rising bond yields have made non-interest-bearing assets like gold less attractive and stocks have proved a far better investment. (CNBC) Shale boom shakes U.K.s $33bn chemicals industry The U.S. shale gas boom is reverberating across Britains chemical industry, the nations second-largest export earner. The 20bn pound ($33bn) chemicals business is losing sales to lower-cost competitors such as in the U.S., where new supplies from domestic shale drilling have reduced prices for natural gas, the fuel used in making chemicals such as plastics. By 2020 the chemicals industry in the U.S. will be 21 percent larger than in Europe, from near parity now, according to the American Chemistry Council. The price of gas, also used to make electricity, in the past month averaged about two-thirds less in the U.S. than in Britain, the steepest discount in five years. Thats giving Americans an edge over U.K. chemicals makers such as Ineos Group AG, the largest. BASF SE, Indias Tata Chemicals Ltd. and Lotte Chemical Corp. of South Korea have shut plants in Britain this year. The U.K. chemicals industry has responded by joining the oil lobby in pushing the government to clear obstacles for drilling shale rock. The threat to chemicals, among the most energy-intensive industries, shows how the widening cost gap risks inflicting further pain on a U.K. industrial sector thats yet to recover from the financial crisis. (Bloomberg) 6

16 December 2013

Events in our back yard

Rajan may hike rates as Inflation surge hits the bonds, INR The rupee fell and bond yields surged on Friday after retail inflation spiked to its highest on record, raising expectations for another rate hike by the Reserve Bank of India (RBI) and adding to the woes of the embattled government. RBI chief Raghuram Rajan said on Thursday he was "very uncomfortable" with the inflation reading, a comment that probably seals the case for him to deliver his third rate increase next Wednesday, despite a weak economy. "Given the upside surprise, and the possibility of higher food prices feeding into core, we see risks that the RBI may tighten earlier than expected," Goldman Sachs said in a note following the data. "We continue to expect the repo rate to go up to an above- consensus 8.5 percent by end-June 2014," it said, a move that would mark another 75-basis-point increase from the current policy rate. The rupee weakened as far as 62.28 to the dollar, a one-week low. For the week, it fell 1.1 percent, after three successive weeks of gains. Bond yields surged, with the 10-year yield up 6 basis points at 8.91 percent. Some traders even flagged the prospect of a surprise 50- basis-point hike by the RBI, though most still expect a more modest increase of 25 basis points. High inflation has been a key factor behind the Congress government's poor showing in recent state elections and it can ill-afford continued discontent among its support base of primarily poor people ahead of general elections due by May. (Reuters) Tata Motors' global sales, including JLR dip 20% in November After a grim standalone performance in the domestic market, Tata Motors' global wholesales number, including Jaguar Land Rover, delivered a poor performance. The company's global wholesales numbers showed a decline of 20% to 81,957 units in November, compared to the same period last year. Cumulative wholesales for the fiscal, too, declined 14% to 674,729 units during the period. The car makers global wholesales of all Tata Motors commercial vehicles and Tata Daewoo range declined 36.5% to 31,254 units on the back of low demand in the global markets. Cumulative commercial vehicles wholesales for the fiscal were down 20% to 306,532 units as well. The passenger vehicle sales took the maximum impact as global wholesales of all passenger vehicles in November was down 63% to 50,703 units. Cumulative passenger vehicles wholesales though surged 111% to 368,197 units. Global wholesales for Jaguar Land Rover surged 15.3% to 39,956 units. Jaguar wholesales for the month declined 7% to 6,753 units for the month, compared to the same period last year, while cumulative wholesales grew 64% to 51,170 units. (FE)

16 December 2013 India's mobile tower radiation norms absurd The governments order to reduce the power of mobile towers radio frequency, to minimise harmful radiation, was detrimental to humans, said an expert from the World Health Organization (WHO). Reducing the power of the tower had increased the emission hazard for mobile-phone users, said Michael Repacholi, radiation expert and first coordinator of the radiation and environment health unit of WHO. Indias decision to reduce the power of the base stations will not minimise any risk. If you reduce the power of a base station, your mobile handset transmits more frequency to stay connected to the network. As the handset is closer to the body, it could cause some health hazard. The order had also made things costlier for telecom companies, as they would have to put in more towers, he said. Repacholi was in India last week and met senior Department of Telecommunications (DoT) officials and made a presentation on WHOs recommendations on the contentious electromagnetic frequency radiation (EMF) issue. The global health body has been working on global emission standards for telecom products. The government had made it mandatory for telcos to reduce the power of the radio frequency in towers to a tenth of what was required under the global standards set by WHO. The move had been questioned by telecom industry associations, which claimed this was unnecessary. (BS) RBI restricts United Banks lending powers The Reserve Bank of India (RBI) has restrained Kolkata-based United Bank of India from advancing a loan of more than Rs.10 crore to any single borrower and barred it from restructuring stressed loans amid increasing concerns over the pile-up of bad loans in the banking system. The action against United Bank followed a spurt in sticky assets at the lender and allegations of shady accounting practices and poor governance. After taking over as United Banks chairperson in April, Archana Bhargava flagged off accounting malpractices at the bank. RBI has been concerned about the increase in bad loans at banks as slower economic growth and high interest rates make it tough for borrowers to repay debts, and stalled project approvals crimp corporate cash flows. Gross non-performing assets (NPAs) at 40 listed Indian lenders rose close to 37% in the September quarter from a year earlier, to Rs.2.29 trillion fromRs.1.67 trillion. Restructured loans have also risen at a rapid clip. The absolute level of restructured assets and NPAs together is around 10% and thats not a comfortable level, RBI governor Raghuram Rajan said in an October interview to Mint. In the case of United Bank, the limit on advances and moratorium on restructuring debt appear to be an interim arrangement until an RBImandated forensic audit of internal practices is concluded. Still, the move unprecedented in recent yearshas embarrassed the Kolkata-based bank and hobbled its growth, its top officials said, asking not to be named. (MINT) 8

16 December 2013

Important disclosures
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