Tuesday, December 30, 2014

2015...Another Year For Indian Stocks

Another Year gone by.Targets.Volumes.Rises.Falls.Thankfully no crashes!

As always what is most important is how much returns you made from the market(or did not make?).If you read my year end posts of 2013 you will realise that I was bullish when everyone was bearish and I asked my clients to use the SiP route into Mutual Funds if they were confused about investing directly.2014 was beyond my expectations.

Carrying on from 2014 I feel surprised that the Energy sector is being neglected so much by investment advisors.After all most of our gadgets(and some cars) run on electricity!99% of transport still uses oil - petrol or diesel,and will continue to do so in the forseeable future.Companies that do exploration,marketing,refining will still be in demand for their products and If you the investor can manage to buy them at lower valuations then all for the better...!!

The consensus earnings growth estimates for FY 16-17 are 15% and with likely premium valuations at 16 times One year estimated PE Ratio leads to a year end target of 9500 for the Nifty.Inflation expected between 5-5 - 6% and 10 Year Government bond Yields at 6.5% compared to 8.2% at present.

The biggest factor is yet again Reforms.Surprisingly,because we all expected some big ones to have been dealt with already after the new government came to power with such a huge majority.

The risk too is the frittering away of the positive sentiments by diverting energy to build temples or these fringe religio-social groups jumping on the government bandwagon to push their own agendas.

If Napoleon demanded 'luck' in his generals,this BJP government certainly has its own.Look how crude prices have fallen from above $110 to below $60.

Some outstanding bets for 2015 are:-
a) Ashok Leyland
b)Finolex cables
c)RPG Life
d)Century Ply

Global pain in the form of the war in Iraq-Syria-Libya looks set to continue.Greece faces political instability.Entire Eurozone growth looks dodgy and the USA looks to be the strongest economy in the world again with growth not expected to be slowed by any rate hikes undertaken by the Fed.

So the final takeaways if you are an investor betting on india would be domestically oriented companies and also the banking and financial services sector as rates are expected to be brought down by the Reserve bank of India some time in 2015.

So  wish you Happy investing and a prosperous 2015 to You...!!

Tuesday, December 23, 2014

Fear Is The Third Derivative

I have been reading the brilliantly lyrical Running Money by Andy Kessler,listening to Reshma sing 'Challa' while looking at the green and red ticks on the NSE - BSE terminal.

The First Derivative is Speed.The Second Derivative is acceleration.
- Andy Kessler

The mighty economies of the west are a shadow of their ersatz glory.The Bengalurus and Mumbais are creating wealth.Moving away from the  barrier broker by the Industrial Revolution.When a Facebook's valuation is almost equivalent of the Top 5 Fortune 500.

From huge machinery led fabrication units called factories to diode lasers and packet switches that help speed up the internet traffic and leading to the increasing networth of companies whyou have never heard of!

Is creating wealth in this century easy?Could I take my Harley out for a spin across a continent or two a la Jim Rogers and find investment opportunities?Oil hunters in Russia?Or find a product to sell to C K Prahlad's 'bottom of the pyramind'who earn less than $4 an hour?

With expectations from the Indian markets high on new political equations,isn't it the time to ask ourselves where the next great investment opportunities will come from?An Indian Tobacco Co(ITC) that has 70% of its balance sheet revenue from things other than tobacco products!

Businesses have become complex organizations with different products.

And FEAR(sorry to disappoint cause it aint an acronym for anything just Fear....fright...!!)

Fear drives innovation.Fear of other competitors,fear of market share,fear of becoming irrelevant.

And the biggest fear of all.....Off not being able to predict the future.But then who really has?

Are the real innovators,innovators?Or Historians?

The Harappan civilization,5000 years before the birth of Christ had a working knowledge of trigonometry and engineering.Go to Dholavira in Gujarat and see for yourself if you do not believe me!So who can claim inheritance to discovering the sciences.

We take a thing,we mould it,put it to a different use and voila.....a new product!Is Uber and Ola....taxi services or aggregators?

"An exception does not prove the rule.It breaks a generalization".

Yet so much still happens by accident,partners meeting on a suburban train and building a Fortune 500 company.Forgetting about a stock in your portfolio for 15 years and finding that its become a mega multibagger due more to happenstance and less to 'intelligent investing'.

In violence was Earth created and that remains in our genes.90% of the brands of our childhood have vanished.The typewriter,the mouse,the landline telephone are obsolete.But do things really change or do they come back in a new form.The Mathematician has his own theories and the Economist his own.

Everything changes.Nothing lasts in the same form.

CHANGE is certainly the third Derivative.

Tuesday, December 2, 2014

The falling Crude Conundrum

The Oil Producing and Exporting Countries decided not to cut back on production despite the fall in brent crude from $100+ to $67 over the past Five months at the meeting in Vienna on 27th November 2014.

Something unusual as they have resorted to this time tested measure whenever there has been even a hint of fall in prices,leaving aside the subprime meltdown in 2008.

Essentially that means a price war between OPEC and the United States.A really risky strategy that blithely assumes that by keeping the rates crude down,explorers and extractors in the US will shut down the shale gas drilling wells due to them becoming unprofitable below $80.

The risk to most OPEC countries is that they need higher oil prices to balance their budgets.Iran for one has been feeling the pinch.This is the other side of the story.

In early 2000s when the explosive and sudden growth in China led to huge demand,the oil companies found that for many years no major discoveries had taken place and not much investment had been made in exploration infra.Result.Crude traded between $100-115 during 2011-14.

Many firms in this field suddenly found it profitable to extract difficult to drill Oil.'Fracking'(incidentally which led to a rally in guarseed prices in India)and 'horizontal drilling in US and Canada led to an addition of almost 5 million barrels of fresh crude to world supplies.

What kept prices low was the civil war in Libya,Iraq and sanctions against Iran that took 3 million barrels per day off the global supply.Iran and Venezuela did try to pressurize the Saudis to cut back production but as happened in the 1980s when prices declined and the Saudis cut production yet crude prices kept falling anyways resulting in Saudi Arabia losing market share.

In the short terms signals emanating out of Saudi Government sources suggests that they can,in the short term,live with prices around $80 as they have built up massive foreign exchange reserves.

This looks like a battle between pumping oil cheaply out of Qatar,Kuwait and Saudi Arabia versus costly extraction from Texas,North Dakota.Reports suggest that the Bakken formation in Dakota can still be profitable as long as prices are above $50.

Conpiracy theorists might feel that this is an attempt by US interests to unsettle the Russian economy for interfering in Ukraine.I for one feel that its a straight out battle between the United States and OPEC.

Oil prices are still higher than a decade ago when crude was trading at an average $40,so with time we will see if OPEC can drive US,Canadian drillers into bankruptcy or themselves lose their nerve and cut production.

Investors in Russia and Iran will certainly be tested in the coming Year.