Buy Gold if you are of the opinion that China is truly going to revalue its currecy

Recently China decided to de peg its currency from the US dollar and allow it to re-value, albeit to a limit of 1.5% a year. With this global markets rallied, commodities rallied with the hope that the trade imbalaces in the world would reduce and economic recovery can be faster. Keeping aside my thoughts that this is just a move based on political pressure before G-20, and the fact that US is not going to let them truly revalue as they may overpower the dollar.

However if you are amongst those who believe that China is talking the truth and will allow full revaluation over the next decade, what should you buy? Well, considering it is impossible to quantify which country will gain how much from the revaluation. I would say Gold is the asset class to be in for the simple reason that if the yuan is revalued, it could become a much stronger currecy than the US dollar (even the ADB has released a report stating the same). If that happens why will China keep its reserves in the US treasuries as they would become meaningless. The only other place where they can park money is in gold. They would shift all their trillions of dollars from US treasury to gold making it the asset class to be in!

With the FIFA 2010 world cup underway, I read a lot of analysis on how sentiment affects stock market during sporting events. Well with sentiment being something very difficult to quantify, I thought of presenting the returns of the stock market during the world cup. The table above showsthe average return during the event and 3 months after it.

Thoughts on US unemployment

All data from US this week points to my earlier post of a pure re-stocking in the manufacturing sector and a worsening housing and job market. With my earlier posts talking of retail sales and manufacturing, I now shift focus to unemployment. With the Fed saying that unemployment will stay high for an “extended period” of time, I wonder will happen to the "reported" figure of 10% unemployed population who have been living off their savings ever since they lost their jobs.
Considering that last 18 months the unemployment data has been this high, we can assume that it’s been that long since the unemployed have had any cash inflows apart from the unemployment , which is also going to stop. The end of the unemployment extension benefit will result in 1.2mn unemployed getting affected by next week.

Also in the past the only way Americans seemed to fund themselves was by investing in housing which I am sure they haven’t been doing (for obvious reasons!). Therefore it has to been how much savings these Americans have and how much longer can it last.

Now can we see a continued drop in retail sales followed by decline in manufacturing data? Lets wait and watch.

The graph above shows the correlation of the stock market with unemployment data. Based on this if unemployment continues to be where it is, the markets dont seem to be heading anywhere in the near term!

Why Indian banks are the stocks to be in?

With the Sensex at 17200, most people have run out of options to put their money into. However one sector that looks extremely attractive at this point is banking. While most private banks are trading at mid-cycle multiples, almost all state owned banks are trading at book values, for core banking operations. If one includes the investment portfolios of state owned banks, the P/BV looks ridiculously cheap for an economy growing at 8.5-9%.
So just why are banks so cheap? RBI’s credit growth target for the current fiscal is 19%, which is what stocks are currently pricing in. Therefore any upside to the credit growth could re-rate the sector.

Why credit growth could beat the 19% estimate? If one looks at the lending by banks for the last few months, retail loans comprising of home and auto loans are showing stellar 25-30% growth while corporate loans are around 20%. With strong end user demand in the economy, it cant be long before businesses start re-investing heavily in adding capacities and corporate loans pick up further steam.

Last two years have seen credit growth of around 12% as most industries had postponed capex plans, due to a slowdown in demand. With demand coming back with a vengeance and sustaining, capacities will have to be added.

Key point to be noted is that credit growth has historically been 3x of GDP growth. Last two years GDP has grown at 6.5% and 8% while credit has grown at only 12%. Even for the current fiscal credit growth of 19% does not match with historical correlation as GDP is expected to grow at 8.5%.

Rising interest rates could also augur well for the sector as it will help expand net interst margin.

With monsoon season underway, the timing might just be perfect to enter the sector as a reasonably decent monsoon will also trigger credit growth in the farm sector and we may suddenly see markets going gung-ho over the sector.

Suzlon rights issue at Premium to CMP. What does it indicate?

Suzlon announced a rights issue at Rs. 63 on 10 June while market price was 54. This inspite of the company reporting losses for last few quarters and an order book that is depleting.

Suzlon promoter holding is 56 percent. Therefore, why was the rights priced so high, as promoters have controlling stake. Either this indicates that Tulsi Tanti knows and expects some great news which no investor has a sense of. Or the condition of the company may be worsening and Suzlon is trying to pass off a PR stunt by indicating that they are very positive on the future and trapping investors.

Food for thought is also that COO Sumanth Sinha has quit recently and has started a financial consulting firm with Suzlon as his first client.

Well if one thinks as an institutional investor it makes no sense to buy as operating environment for the company is still weak. However if one thinks like a pure day trading speculator, one may just go long at CMP of 55 and play for the fact that some great news is expected and stock may fly to 63 in no time!

Take your pick!

How Germany ruined the Euro Zone and how they can save it

About a decade ago, the world looked on with envy when a single currency was created in the EU. Everyone thought that this was the way forward, without really thinking about what happens if things go wrong. Depriving countries of their own currency printing presses has proved how Germany used the poor EU nations for a selfish motive. For starters, it was Germany who used their political clout to help small meaningless countries such as Greece, Hungary etc to become a part of the Euro. This was aimed specifically at ensuring that if these countries were part of EU, the Euro would trade weaker, than the standalone currency of Germany. German exports were in trouble a decade before the Euro was established as the Deutsche Mark was quite a strong currency.

With this devaluation of the Euro, Germany’s exports flourished and the economy was constantly expanding at the cost of poor nations such as Greece. But remember what goes around comes around and now Germany is singlehandedly paying the 1 trillion Euro to basically save every bankrupt nation in Europe.

The silver lining here is that over the last six months, the Euro has depreciated significantly to the US Dollar. Assuming that the end consumer is the American, this devaluation of Euro may just prove beneficial in reviving demand as products will become cheaper. Of course this is a function of how the US economy grows, as in theory fiscal prudence results in more contraction of the world.

However assuming US expands at over 3% next few quarters and somehow stays out of the EU mess; Germany may just well be able to save the continent.

What has to been seen is, if “things are different this time” as it’s the US that has to call the shots on staying out of EU.

US Retail Sales- May2010 down 1.2% v/s +0.2% expectation

Just few hours into my first blog post and I read that the US retail data has come at a negative 1.2% for the month of May 2010. However what was interesting was that the consumer confidence was at a two year high at 75.5. Either I may go miserably wrong on my prediction that this downward trend will continue or may be the confidence number may start to weaken next month onwards as consumers start seeing the fallout in Europe and start fearing from the double dip recession.

Has the Index of Industrial Production peaked?

Indian IIP growth at 17.4%, splendid, but for how long?

The IIP numbers announced today were higher than consensus of 13.5%, contributed significantly by growth in manufacturing at over 19% which contributes to 80% of the index weight. The point to be noted here is that we still are benefiting from the base effect as until June 2009, the IIP numbers were flat year-on-year. If one observes the IIP data on their absolute number, the numbers have shown a consistent decline over last three months (March had some exceptional spending on certain projects).
With the base effect expected to go away in the June-July IIP numbers, combined with lower absolute numbers, the IIP will look lower on both YoY and MoM figures which may define sentiment.

Also inflation refuses to come down, and RBI will now look to aggressively hike rates as the latest food inflation numbers have again started to go up.

In this rising interest rate scenario coupled with IIP data that may have peaked, what trigger shall be there for markets to go up?

Is the US really out of trouble??

Markets are of the view that the recession is over and the chances of double dip have reduced significantly. Really? Lets just analyse some of the key data points people are celebrating about.

First data point-GDP; if one looks at pure GDP numbers of the US, sure they look fancy as they seem to suggest a 3%+ growth from the base but the point to be noted is that 75% of this came purely on the back of re-stocking. The largest weight was added by Manufacturing, which was nothing but pure re-stocking as inventories.

Secondly everyone seems to suggest that retail sales are back on track and the great American consumer is back in the market. My point is, last year in May-June, the savings rate to GDP of US was at a historic high of 6.4%. Now this coupled with steriods such as cash for clunkers, tax rebates on home purchases etc, the typical consumer was fooled into believing that things are getting better and started to spend the pot of cash in his pocket. This resulted in the savings rate dropping drastically to 2.4% in June 2010.Now that the steriods (read: stimulus) are loosing sheen and the consumer has spent the cash he could, will he really come back and buy?

Next lets talk about unemployment. Again at almost near all time high. If one
observes the pattern of last six months, there has been no improvement at all, in spite of the fact that this data includes part time workers etc. The fear of loosing jobs are back to the post Lehmann explosion days. Sentiment is weaking faster than ever. The jobs data last week proved that the private sector is still skeptical on hiring as just 4000 jobs were added. Now the next expectation is for retail sales to slow down.

And best of all data is the housing data, which people dont tend to bother about because of the typical herd mentality. Just because everyone is buying, we must also buy! This data that will worsen even further. Not like its any better than it was in 2008. Latest numbers show that the foreclosures are back to record breaking days with May posting an increse in every state. The 8000$ tax credit program has ended and whatever few houses were sold due to this will also cease to exsist now. Although this has not been reflected in the data yet as the number being reported until now includes the data of people who had applied for loans to avail of the tax credit but are still awaiting the final purchase. Once this backlog is cleared, the numbers will fall sharply. Interestingly if one were to observe, the amount of foreclosed homes lying with banks, at current selling trends will take them close to a decade to clear off (assuming we are not adding any more to this!). Hence the supply is going to be phenomenal in housing and I do not see any recovery in the housing market for years to come.


So just how much can we rely on pure "lies"(read: statistics)