Contrasting Signals

The world economy has lot of negative news which have not been fully factored in stock prices while India has lot of positive news that has been factored in Indian prices .

They key is what will happen when negative global news get factored in Indian stock prices like slowdown in commodity prices ( which might impact global consumptions ) , interest hikes in US which might reverse liquidity flows and increase risk premium .

Nifty is trading higher than fair price zone and that means factor of safety is no longer there , so it is time to tread with caution

Rail Budget & Investing

Rail budget - A disruptive event that broke shackles of subsidy or is it a missed opportunity to encourage more market based pricing .

Well this event is indicator enough from government to investors that government is keen to take tough steps in first few years of rule so that finances can be improved and these subsidies can be channelized better for higher social impact .

Investing becomes fun and rewarding when the regulation is limited to goverance and not micro market operation .

For me this is a good step , but I would like to see how government would use the extra money to improve rail infrastructure .

Crazy Sensex : 100000 by 2020

Last eight months have been eventful . Market has come full circle from extreme pessimism to high level of optimism  .

BSE Sensex @ 100000  by 2020 is the new prediction . In these crazy times traditional value investors are  pretty scared . 

But why be scared if you have invested in good companies one may ask . Well the problem is wonderful companies do stupid things when market is bullish

Management suddenly think they are responsible for increase in stock prices and start awarding themselves exorbitant compensations . 

Expensive acquisition , high leverage expansion , crazy financial bets follows which dramatically reduces balance sheet strength.

 The end results we all have seen in 2008 crisis . Lot of potential great business have been destroyed or impaired . The reconstructions of impaired companies have taken more than 5 years and lot of them are now just turning corner . 

I really hope this journey of Sensex to 100000 does not create exuberance in mind of Indian entreprenuers and they with lessons of 2008 act and manage their business with cautious optimism . 

Idea No 8 : Don't leverage to buy stocks but ride on firm's operating and debt leverage for huge gains

Cyclicals Stocks : These stocks are excellent examples as to how one can benefit on firm's operating and debt leverage .  

What are Cyclical stocks ??

This  category of stocks that success and failure depends  heavily on the business cycle and economic conditions . Metals , Manufacturing , Automobile and auto ancillaries etc are part of this category.

Consumer cyclicals include industries such as automotive, housing, entertainment and retail. The category can be further divided into durable and non-durable sections. Durable cyclicals include physical goods such as hardware or vehicles, while non-durables represent items like movies or hotel services. 

The performance of consumer cyclicals is highly related to the state of the economy. They represent goods and services that are not considered necessities, but luxurious purchases. During contractions or recessions, people have less disposable income to spend on consumer cyclicals. When the economy is expanding or booming, the sales of these goods rise as retail and leisure spending increase.

Consumer Cyclical stock Buy decision : 

Ideally stick to market leader or second player as the profit margin reduces dramatically in relation to market share . The right time to buy is 2-3 years in to bear market when most negatives have been factored in and industry capacity reduces by Min 20%  . Guiding Value indicators 

The Max ( Avg last 3 yrs )  PE ratio  to be paid at any time is 10 
Debt equity ratio should not be more than 1.5
Prices to sales ratio need to be capped at 1


Consumer Cyclical stock Sell  decision :

The right time to buy is 3-4  years in to bull market when most positives  have been factored in . You may decide  not to sell the stock if you are in country where population is growing . Guiding Value indicators 

The PE ratio is greater than 20 
Debt equity ratio is greater  than 2 . 
Prices to sales ratio is greater than 2

Consumer Cyclicals tend to have high operating and debt leverage relative to defensive and hence these stocks exhibit sudden increase in profitability when economy starts booming  and can turn out to 20 - 50 bagger before becoming expensive . So if you have picked the stock at right time it is better to hold the stock for at least 5 to 6 years . 

A small example below illustrates how consumer cyclicals can become 20 bagger 

Simple Worksheet
	Bear Market	Bull Market
Revenues  in Crs	1000	2500
Varaiable cost 60%	600	1500
Contribution	400	1000
Operating leverage
Capacity Utlisation	50%	100%
Fixed Overheads	100	100
PBIT	300	900
Debt Leverage
Long term Borrowing  Cost	10%	8%
Debt	2000	1000
Interest	200	80
PBT	100	820
Tax ( 30%)	30	246
PAT	70	574
PE	5	15
Share Price	350	8610

  

Crazy Investing : Modi Wave

Last few weeks have been great for Indian equity market .Well but is this hope justified ??

In Crazy investing one of key success mantras is probability of success . If the probablity of success is skewed towards you it makes sense to take up the bet .

In the current Modi wave people feel the probability of economic success will be high and hence this crazy optimism makes sense .

How do  I react ??

As always I am bigger fan of micro  crazy events . Macro Crazy events are for BIG boys or institutional players . They can encash it better than us on account of information asymmetry . In most crazy macro events like FED taper , Internet BOOM or BUST or MODI wave , it is better we let large players win and lose as small players will be crashed to death by turn of events .

In any such Macro tsumani small investors should  take shelter of time and let the overall optimism and pessimism ride away . Often post such tsuamani lot of naked truth are exposed at micro level and often we get lot of companies either  at  bargain prices  to buy or ridiculous prices giving opportunity to sell .

Well I had a great run during 2008 - 2012 FED mistakes and corrections , now the opportunities are plenty on account of Modi Wave .

Let us all ride it ...

Dangerous time ahead

Well job report in US indicates all is well ( if not now will be slowly in future ) , Indian markets rocks after Budget -- > but people are scared ...

We often discount what we feel and try guessing what others will do in such a market .

Deep down in my heart I am not convinced what is happening is right

Why market should be where it is Right Now -- Inspite of difficult economic environment

The further tightenting of economy in addition to pressure on liquidity due to repayment of TARP funds will impact market one or the other day

High Unemployment + low credit ( on Credit card ) availability + higher saving by people who can afford to buy ; will impact sales volumes ( if not value which will go up on account of inflation and reckless printing of money) ..

So the scary truth is PE for Stock market should not greater than single digit in such a market .