Friday, June 27, 2008

A blog after a really longtime......

But it took me long to assimilate and indeed sorry for the delay..
I don’t know where to start, how to start but I will make an attempt. It was January where the same markets were booming and now each day I see stocks at throwaway prices. Are the indeed so cheap? What's the difference in the same markets from Jan to June.............that it has corrected nearly 30% from the tops...
Small caps have lost nearly 50-70% some even reduced to 1/4th of their market cap (or price). How and why did this take place?

It all starts so.... A fresh year starts in January all parameters were under control...easy available of liquidity, companies all set for their capex expansions plan, credit at cheap (if not cheap at least at moderate) rates , Inflation (around 3.5%) well under control and hence the economy was all set to grow from there. In addition markets boom in January as well generally. January brought all new hopes to FIIs , retail investors, companies and even to the Indian economy.

But the world is dynamic. Inflation crept up as crude which was expensive went more expensive i.e. from 95 to 135$ a barrel up nearly 35%. Crude had already rallied last year from $70 levels to $100+ and the rally continued. Crude took energy prices up as well as other commodities creating a huge problem for not you or me but everyone. US suffered from the rise but emerging economies suffered much more as emerging economies (Indian and China) were the place driving the demand story for crude. Supplies were almost constant. Discovery new fields were on a decline as per the trend. Short Term crude prices are projected at $150/ barrel some say even $200 barrels. On the other side of the coin we have people stating $60/barrel. My idea on this is....the price is high as the demand has increased. Demand cannot come down very quickly as shifting to alternative energy sources immediately is not so easy. Moreover, Growth continues so Short term demand seems robust, keeping short term inflation robust. The only way to fight inflation is to increase interest rates (REPO ,CRR, PLR and so on). But that may hinder growth as credit will become expensive in the short term for consumers as well as companies eyeing their capex plans.

As Growth might slow down, definitely not too much , we see the demand to lower, thus in turn bringing stability by stabilizing the demand supply curve. Production may also increase as promised by some of the OPEC countries. Inspite of this, from these levels crude looks bullish. I am definitely bearish keeping the long-term perspective wherein non-conventional sources and renewable sources called crude alternatives may come into play. But it is not as easy as I said.

To cut a long story short, I will have a cyclical representation.

(need to show a diagram)

Crude is all ok, but what does it imply to our economy? Lets take an eg…The reality sector is hit hard so hard that even the top favorites are at below IPO price. The scenario needs to be understood carefully. The prices of raw materials will increase due to inflation. Development needs credit which will be difficult to find as lower no of capital investors due to slower growth. Moreover if credit obtained it will be quite expensive creating high interest costs. This will make the company suffer on margins. Moreover consumer demand will slow down which may be investor driven or end consumer driven. End consumers may find difficult to buy property at high interest rates or EMIs. This will also mean that funds may be blocked in developed and undeveloped land creating in a slight competitiveness, decreasing property prices. Decreased property prices will also decrease investor morale as well as hit company margins. It may continue till inflation rises and interest rates are hiked until an equilibrium all parameters are obtained.

This is not to end up with all but the interest on credit and capex plans of all companies from engg to Consumer durable (CD), capital goods (CG) , infrastructure , power and banks as well. In fact, bank margins may decrease due to high interest rates. Lending of credit will be also on a decline. All types of capex plans signify growth. Any hindrance in it means a slower growth. The question is how slower? And the answer is how much inflation………..and to reduce it, is a the rate hike in interest enough.

So we go round the bush and end on inflation. How can single commodity crude drive inflation? Energy is a must, for life to sustain and increase in energy demand is imp for growth to sustain. Crude is not just energy but its byproducts have an array of organic compounds that generate a dye to turpentine (industrial solvents) to water proofing agents and even drugs. It affects every individual directly or indirectly. Every individual travels or buys goods that use logistics. Nothing grows in a city where I live called Mumbai. So it affects me a lot indeed.
Hence is crude is a lot to an industry and an individual but not only energy. Moreover rise in crude promotes rise in various cereals and foodgrains used for generation of ethanol via fermentation. Ethanol is a crude substitute. Thus foodgrains are at a shortage as they are used for energy purposes. In addition crude drives the energy basket increasing prices of coal, cooking gas, etc. It also drives gold and precious metals along and sometimes even base metals (copper, zinc, aluminum, lead ,tin) sometimes. Hence in one way it drives inflation.

Another large concern is political instability in India as well as US due to elections. In short too many negatives and too less or none positives.

So…..What can one do in the scenario…

India and China will have to grow and there is no doubt. Population will rise consumption story will continue flourishing it as a better domestic economy. Global problems may subside, like crude which is globally affected we import it so we import inflation. Land has to become less and infrastructure is a prime need in infrastructure ruined country. Its like India has to grow …so infrastructure has to…
So if valuations are low one can look at long term. Global problems need time to get stabilized so do political problems need time. We import inflation as we import crude and rise in crude is a global mega-problem. The apt saying describes the recent fall “ Sell in MAY and go AWAY”. But after every may is a January which makes markets boom.

The markets are demanding. Two things obviously, your money and your patience (time). So wait and watch and don’t loose it!!!!! (‘it’ means money as well as patience)

-Govinda Ahuja.