February 2013 Broke The Back of Indian Market - Nifty

If there was "Hope" Index in Indian market, I would be eternal buyer.....
O Ashuji


I have time and again (please read previous posts on Nifty) discussed how nature of market changed in 2013. Not only broad market collapsed but defensive started outperforming. Since June 2012 low to December 2012 rally was broad based and its nature completely changed in 2013. However, it was February 2013 that broke the back of NIFTY.

Let the DATA talk....

Top Performing Nifty Stocks Since June 2012 Low

February 2013 Nifty Top Losers

2013 Nifty Top Gainers and Losers

Conclusions
1) Most of the gainers since June 2012 lows were beaten out of shape in February 2013...Break of ICICI, AXIS and Maruti was critical.

2) 20% of Nifty stocks are down 20%+ in 2013 and gainers are primarily defensives (Pharma & FMCG)

3) Nifty's Feb 28th close was 5693 and today's close was 5689....thus Nifty has been basically flat for 31 trading days...It is very rare for back to back month having less than 1% closing basis move. This has happened only once since 1991 where back to back month had less than 1% closing move. It happened in July-Aug 2012 which was followed by 8%+ move in Sep 2012. May 2013 could be wild.....given the nature of bounce and broad trend, downside is more likely. 




Nifty April Gainers....led by beaten down and oversold stocks.....Interestingly Pharma makes to the list which shows nature of bounce in April so far...

40% of Nifty is negative now since June 2012 rally....Though Nifty is up 15%

Some Perspective on Gold's Recent Fall......!!!!

When believing is knowing then ignorance is bliss......
O Ashuji

Commodities have corrected significantly in last 3-4 days with Gold Silver experiencing historic fall. Nobody is debating significant nature of Precious Metals fall but most are trying to find positives from the fall. Gold and Silver were largely range bound since their first collapse in 2011. For almost year and a half both were largely range bound. Such nature of fall after being largely range bound is very unique and indicates something more than meets the eye. If an asset class which has risen 100% in a year's time and then falls 50%, it is normal, but something which is ranged for more than a year and then suddenly collapses is not normal. 
I have no idea about reason for the collapse in Precious metals nor will get into intellectual masturbation over the same. All I can say with reasonable degree of confidence is such fall is not normal and indicates something (in fact a lot) more than meets the eye. Could it be liquidity scare ? Deflation scare ?....I have no idea. 

Let the DATA talk....

Top Gold Holders

1) SPDR Gold ETF is today 7th Largest holder of Gold down from 6th at the start of the year.

2) At the start of 2013, SPDR had gold holding of 1351 tons, implying the fund has sold MASSIVE 197 tons within 3.5 months.

3) Just to put things into perspective, there is lot of talk in media that Cyprus selling has caused panic. Cyprus holds 13.9 tons of Gold. There has been 4 days in 2013 when more than 13 tons of Gold was sold by SPDR (20 Feb, 18 March, 10 & 12 April)
Hence, Cyprus holding is absolutely irrelevant.









SPDR ETF Monthly change in holding (Tons)

Gold Monthly Returns (%)

1) Feb 2013 had highest ever monthly outflow of 77 tons from SPDR ETF followed by 2nd highest outflow of 67 tons (so far in April), taking 2013 tally to 197 tons.

2) April 2013 has been 2nd worst monthly fall since at least 2005 (last one being Oct 2008). Such fall in Gold Prices can't be normal. Oct 2008 was peak of crisis. Something Somewhere has changed big time.....

Gold Price Fall in Indian Context.....

Lot of experts are jumping around claiming that falling Gold/Commodities are good for India because it helps in reducing CAD. This is the best part about Funda"mental" exercise done by these so called experts who give higher weight to their views than facts or history.
Wealth effect created by boost in asset price is very counterproductive because it ALWAYS creates illusion of permanence in wealth and boosting consumption.  When there is sharp fall in the asset, it can be very painful. According to world gold council estimate, Indians hold around 20k tons of gold worth around $1.1trn. Last 4-5 days alone have eroded this value by $170bn. 

Many experts are excited that such sharp fall is good for Indian Equities...in that case Crude decline from $147 in July 2008 to $35odd by Oct 2008 should have been haven sent opportunity....Crude fall started most intense period of financial crises.....

Such large erosion in value of the financial asset doesn't result in shift of money seeking higher returns but safer returns. I find it amusing when experts talk that money from gold will shift into other assets. Ask any holder of gold or silver what will he do with his eroded capital....?? Its easy talk when one has no sense of how trading works....

Gold/Commodities are widely owned asset, such sharp erosion in wealth doesn't result in Risk Seeking Behavior....GOD HELP THOSE WHO BELIEVE SUCH FALL INDICATES BETTER TIMES FOR OTHER ASSET MARKETS....It clearly shows text book thinking where rationality prevails over emotion but in real world gain or loss of wealth always trumps rationality. 

What does massive broad market damage (fore)tell about Indian Banking Stocks.....??

Price action in stocks itself reveals a lot about future yet most of the times, it is ignored and thus big trading opportunity arises....
O Ashuji....

I recently came across interesting data point which said that 697 stocks out of 2400 actively traded stocks on BSE (source - www.moneycontrol.com) are trading below 2008 lows. This equates to roughly 30% of actively traded stocks. However, If one were to consider BSE 30, Nifty 50, BSE 100, BSE 200 and BSE 500, picture is slightly better. Please refer to below table.

Number of Stocks Below 2008 lows

(Source - www.moneycontrol.com)

I decided to take exercise a little further and find out debt levels of these companies over 2010-2012 and based on Debt/Market Cap, what is market effectively telling about these companies.

Methodology
1) If Debt/Mkt Cap is >10x, then company is as good as bankrupt (even assuming 10% - which is conservative for such companies - market cap of these companies is equal to one year of interest payment).

2) Debt level increase for such companies over 2010-2012

3) Further filtering these companies with market cap of >Rs 100cr.

4) Here (for the entire data point under analysis) only those companies are considered which have gone below 2008 lows, so actual picture can only be worse than this for banking industry. 

5) Since these companies are effectively declared bankrupt by THE MARKET, how severe banking industry could be impacted ??

LET THE DATA TALK......

Companies with Debt/Mkt Cap > 5x 

1) There are 119 companies with Debt/Mkt Cap >5x.

2) Debt for these companies have increased by 81% over 2010-2012 and on aggregate basis Debt/Mkt cap stands at 12.6 

3) Aggregate Debt stands at Rs 2.61 lac cr

1) There are 88 companies with Debt/Mkt Cap >10x

2) Debt for these companies have by Rs 95k cr (or 91%) over 2010-2012 (pls note data for kingfisher -2010 and 2011- has not been included which would affect increase but not materially)

3) On Aggregate basis Debt/Mkt Cap stands at 17x and aggregate debt stands at Rs 1.99lac cr


Recently Damaged Stocks
Companies with Mkt Cap > Rs 1bn, Price Damage of 20%+ in 2013 and Debt/Mkt Cap > 10x

1) The idea behind putting the above table is to show recency of damage. If damage is old, it is likely to be reasonably well discounted.

2) Debt levels for such companies increased by Rs 55kcr (79% increase) over 2010-2012. Total Debt level for such companies stood at Rs 1.23 lac cr.


CONCLUSIONS

1) I have considered only those companies which have gone below 2008 lows, hence actual picture can only be worse.

2) There are 119 companies with Debt/Mkt Cap of 5x (total debt of Rs 2.61 lac cr) and 88 companies with Debt/Mkt Cap of 10x (total debt of Rs 1.99 lac cr)

3) Recently Damaged Such Stocks (damage of 20%+ in 2013) have aggregate debt of Rs 1.23 lac cr.

4) I have no idea how much of these debt has been recognized by Indian banks but nature of recent fall (and aggregate debt of those stocks) suggest that banking stocks could be significantly impacted over coming months. 

Fooling All People All The Time.....!!!

If you take "financial experts" on "business channels" seriously then you are not taking your money seriously....
O Ashuji

Accepting Ignorance in market is a great and first step towards a successful trader/investor. There are no rules in markets because human emotions are not driven by rules and that is precisely the reason if mind is not adaptable, money will not be made consistently. However, here we have some comedians who consistently apply same methodology all the time, expecting same results. Concepts like Average P/E, historical P/E, Relative Valuation, etc are applied all the time depending on the mood of these so called experts. When nothing works for rationalization, say cheese with liquidity. I will say Time and Again....reading and understanding the way price behave is far more important than understanding the reasoning of its movement. Idea is to make money and not intellectual masturbation.
Most experts on business channels intentionally or unintentionally believe in "FOOLING ALL PEOPLE ALL THE TIME". These guys have absolutely no accountability of their views. Just like cautionary warning with  smoking, expert views should have disclaimer "listening to these experts is injurious to wealth, listen at your own risk"
Below I will just give one glaring example of one such expert....and point how just because price damage happened explanation changed
For Further on Uselessness of Fundamental Analysis....
 http://speculationanart.blogspot.in/2013/03/analyzing-price-moves-fundamentally-is.html

Sanju Verma sees Sensex at 22K by Mar 2013, suggests bets (12 Dec 2012, CNBC)

Q: Is this an opportunity to buy into the dip after Friday’s cut or are you getting a bit cautious on trade?

A: We are not cautious as yet. We are looking at the market inching towards our fiscal year-end target of 22,000 by end of March 2013. Given that we have rallied 20 percent plus in dollar terms this calendar year, having roped in more than USD 21 billion by way of FII flows, one easily starts thinking that maybe the liquidity driven rally has run its course, so has the valuation based rally The market, on trailing earnings, is not looking cheap. Assuming an EPS of Rs 1,400 for FY14, the market is trading at about 15.5-16 times, mid-cycle valuations.

I think the second quarter FY13 numbers clearly told one story. While top-line growth may have come down from 20 percent plus, which we have been used to seeing over the last one year to a dismal 14 percent, the more important and optimistic scenario was thrown up at the EBITDA level.

BSE Sensex (Indian Market) was then at 19255...and this expert believed at about 15.5-16x, it was mid cycle valuations. 

Fast Forward.....3 Months down the line which is long term for these experts....comedy circus begins...

Indian equities overvalued; focus on rupee: Sanju Verma (4 April 2013, CNBC)

3 MONTHS BACK TARGET WAS 22000 BY MARCH 2013....WE ARE IN APRIL 2013 AND MARKET IS FOUND EXPENSIVE AT 18500....BEST PART IS THERE IS REASONING FOR BOTH CALLS.....!!!

Q: Do you think we are headed for a big waterfall slide in the market and if yes what could the extent of the correction be?

A: We need to take a hard call and look at fundamentals on the ground before we decide to be bullish or otherwise (sorry I was flying on air on 24th Dec 2012). The screen is screaming red at this point in time. It is a sea of red. I may be called a brave heart to give a bullish call.

The macro scenario is certainly not looking rosy. The only reason S&P 500 has moved up at today’s levels is because the S&P is trading at something like 16 times giving an earnings yield of 6.25. Given that the risk free rate in the US is just about one percent or even lower, it basically means that the equity risk premium for the S&P 500 set of companies is just about 5.25.

This indirectly means that equities in the US are grossly under-valued because the higher the equity risk premium, the more under-valued the equities class for that given geography. If I use the S&P 500 rally as a benchmark and extrapolate the workings into the Indian context today at sub-19000, the market on one year forward, assuming that the EPS for FY14 will be in the region Rs 1300 or Rs 1325, the PE works out to something like 13.5-14 times which gives an earnings yield of just about 7 percent.

If I were to compare the 7 percent earnings yield with our risk free rate which is the government securities (G-Sec) rate which is close to 8 percent, then the equity risk premium for the Nifty set of companies is actually a negative 0.86. This means that equities as a class in India are grossly overvalued.

WOW......What can I say....

It needs to first get into the positive territory with respect to equity risk premium even before calling for a buy on Indian equities as an asset class. That’s the absolute bearish view which takes into account all the negatives; be it with respect to the current account deficit (CAD), poor earnings trajectory and a macro which seems to be flip-flopping between the good and the bad.

However, I am of the firm belief that USD 25 billion that we made through FII inflows last year had nothing to do with macro. It had even lesser to do with earnings. What it had to do with was just liquidity and liquidity alone fueled the 20 percent plus rise in dollar terms that we saw in the broader indices. So, the question that we should be asking is will liquidity continue to flow in or will there be a stop there for good.

We have pulled in on the equities front more than USD 8 billion in this calendar year. Will it continue? I think rather than getting carried away by the stock market, one should look at the currency market. I have always maintained that currency markets are nimble footed and a precursor of things to come in the stock markets. I am surprised that despite a 6.7 percent CAD number for the December quarter, the rupee has by and large been steadfast. Even in the non-deliverable forward market, rupee is trading at just about 55.25/USD or 55.35/USD at the worst. I think that is a positive.

Over the last one year, on a year-on-year (Y-o-Y) basis, rupee has depreciated all the way from 50/USD to 54/USD which is a depreciation of 7 percent. Over the last two years, rupee has perhaps depreciated by more than 20 percent but the point is that despite huge amount of negative news on the forex front, the rupee has held steady which means that there is something that you and me don’t know.

It is so scary to follow these guys because they have explanation for everything without an iota of responsibility/accountability.....

Bernanke Mojo vs Reality....and Global Markets on Verge of Significant Correction.....

US stock markets still believes in Bernanke Mojo, while most other markets are waking up.....!!
O Ashuji...

Most Asset Markets have completely changed in terms of performance since 2013. There has been massive divergence between asset markets since 2013. Most Global markets bottomed in early June 2012 and had uniform run till December 2012. Such change in behavior is a process and is usually associated with major corrections. Let the DATA talk.....

Major Asset Market Performance Since 2013

1) Most markets started with Risk On mode and created Bernanke's wealth effect in Jan 2013. EURO, METALS AND MOST MARKETS (except Brazil and Korea) had good run in Jan 2013.


2) However as we got into Feb 2013, Bernanke wealth effect started fading and  few markets started lagging behind most notably Gold/Silver and Euro. Among stock markets Italy, India, Spain and Brazil fell hard.

3) Come March and Few more markets joined and left Bernanke's wealth creation bandwagon....they were Copper (-8%), Russia, China and few others...

4) Please refer to table for further self explanatory decay in various asset markets....



Conclusion

1) There has been gradual decay across asset markets since 2013, which is typically sign of major topping process or major correction. 

2) Continued US out performance visa-vis most markets is sign of significant dollar rally about to come

3) US market is last man standing still having bernanke mojo.....while most other markets have woken up...

Global Equity Markets About To TUMBLE.......

Disconnects between equity markets, FX and Metals (Gold, Silver) are getting very scary....For some technical reason not able to put data...will put as soon as it is sorted....most asset  market behavior is showing dollar is about to rally hard....and same will wake up equity bulls from slumber....