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Archive for February, 2012

Tiny Roommate(s)

First Blood
It started with a squeak and the sound of moving polyethylene. I moved towards the source of the sound to investigate. The result was mutually startling. Both of us did not like each other. The mouse leapt out from the sill and disappeared into the neighbour’s room through a crack under the door.
Now, my room in Delhi shares a common door with the neighbouring room. I immediately began constructing a newspaper fortress under the door. It consumed a lot of paper but by the end of it, I was confident of thwarting this new challenger.The fortress served its purpose for some time. At least I thought so.  How wrong I was, was proved one night a month later, when I saw the creature poking its head in some utensils. I ran to scare it away and it took the now familiar route under the refrigerator and out of the door.Sure enough, the paper fortress had gaps. I began plugging these with the determination of an engineer doing urgent repair work. The enthusiasm wore off soon enough. It became apparent that this mouse was so tiny that it only needed the tiniest of gaps. Besides this, it knew how to cut through paper. At 1 a.m., here I was, having digested my first defeat at the hands of a mouse.
Cat and Mouse

I decided to take a hands on approach to the menace. So on its next intrusion, I began attacking it with a long ladle. The cunning mouse kept out of harm’s way behind the gas and I gave up after  some time. It was jumping up the gas pipe to climb up and reach the otherwise unattainable sill. I have to concede, the mouse is really gifted at the art of jumping.

Another time, the mouse hid so smartly behind some utensils that I began doubting my eys at having seen it at all. Even drum beats on the utensils did not make it reveal its presence. The moment I moved back to the computer, voilà, swishing sounds.

The next night, there were some grains of rice that had been spilt near the burner. Sure enough, the mouse began to nibble the savoury snacks. This time, I did not do anything but just observed its movements. I couldn’t have done anything either because by the time I would have grabbed anything, the thing would have fled.

The entry of the tiny roommate made me change my habit of keeping half eaten snacks around the room. Now everything was kept secure. When I left for my home in Bhopal, I made sure I had kept everything in the fridge or the almirah.

On my return, I found things as I had left them and began self congratulating myself on this victory. Little did I know that I had stupidly kept one cardboard box with packets of noodles and other crunchy snacks at the mercy of the mouse. I was scared to open the box, knowing not what to expect. It turned out to be nothing more than empty wrappers of Maggi and Haldirams. The mouse had determined me to have a healthy diet and had thus had nobly sacrificed its six packs by eating all of the junk stuff.

Discretionary tastes

The mouse, who is growing fast, now has a tiny brother whom it chases whenever it is bored. The two of them spend sleepless nights looking for food and education. They have been ingenious enough to climb to the almirah top and access their favourite food: annual reports of infrastructure and realty companies. It also digests Business Standard in full beating MBA students to the task. This chewing gum I have placed at various locations as I do not approve of computer wires serving the same purpose. I now wash every unused utensil every day and keep no important books lying around.

I have allowed a cat to transgress into the room a couple of times so that it can scare away the mice or better but it has not worked. I have been tempted by ads of Mortein Rat kill and have even kept some in the room but somehow have not been able to bring myself to using it. I blame Warner Bros, Hollywood and National Geographic. By making ‘Mickey Mouse’, ‘Ratatouille’, ‘Tom and Jerry’ and countless documentaries on the lives of smaller creatures, they have forestalled my offense.The sound of moving polyethylene and a obscure scratching sound confirms that it approves.

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The Subzi Haat

The Subzi-Haat or simply the Haat is a place that simply radiates life. There  is life in the cartloads of fresh vegetables which are soon going to infuse fresh energy into the systems of thousands of human beings. There is life in the hundreds of vegetable sellers who shriek at the top of their voices trying to attract customers to their vegetables. There is life in the enthusiasm with which neighbourhood aunties bargain for five rupees with the subzi wallah. There is excitement in the way that prices drop suddenly across the market because of the failings of a particular vegetable seller who himself is driven to desperation because of the  fear of having to carry his goods back home; the life at the haat, incredibly increases as the time of market closure approaches with unbelievable deals being offered.  There is life in my effort to locate that particular vegetable or fruit seller who sold me those capital radishes at that throwaway price last time and in my failure to do so among the sheer numbers.

The one-handed fumble for change(the other one is grasping a helmet or a bag), the painful long jostle through the crowds back to the car/bike with arms bursting from the weight of those two bulging shopping bags, the frustration of seeing peas at 12 rupees after buying at 15 rupees, the insincere consolation to your mind that yours must be the better peas, the impulse buying of the 12 rupee peas as well, the realization that your refrigerator and stomachs simply do not have the space to accommodate those bulging shopping bags: the subzi haat is an experience of life that not everyone steeped in the metro life might quite have either the chance or the inclination to savour.

P.S: The economic angle: The haat is the perfect example of perfect competition that economics tries to peddle. Demand meets supply and high prices directly hit sales. The prices are also such that everyone is able to participate thus leading to a much more realistic price discovery.

It’s All About Liquidity,Stupid!

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The Nifty has crossed 5500 and the Sensex is at 18300. There may be no core fundamentals backing a rally of this magnitude but that does not matter. As I wrote in my previous article, we are in a purely liquidity driven rally.

However, this rally has also taught me a lot in addition. First of all, rallies are powerful only when driven by liquidity, not fundamentals. Fundamentals play only a supporting role. The Fed’s unleashing of liquidity in 2009 kickstarted the recovery from the lows. The ECB’s unleashing has done it now.

It doesn’t really matter if there are no fundamentals because when money is cheap, risky assets like stocks will move up. It is also true that the markets will fall but that will happen not because of waning fundamentals but waning liquidity. Go back to 2008 and you will see that decreasing liquidity preceded the fall and the bottom was reached at the time of the worst liquidity crunch in a long, long time.

When there is a clear trend in stock markets, fantastic money is made in a very short time frame. However, then the fall, consolidation etc. comes which tempers the long term returns significantly. Thus as the time in the markets increases, the returns become far less impressive. We have witnessed a 20%+ rise in the benchmark indices and more in the midcap indices. People have made more much money in this time frame than investors have made in four years(even not adjusting for inflation.

The very long term is supposed to belong to fundamentals but that is entirely a function of the point at which the investor is evaluating his investment. Companies with great fundamentals languish at lows because there is no buying interest (no liquidity) while bogus companies run up like crazy.

The fundamentals basically are needed to sustain a stock at higher levels otherwise it falls when liquidity dries up. However, when liquidity for the entire market dries up, even strong stocks fall rapidly and so one can avoid losses only if one has entered at lower levels.

In toto, better to play liquidity for market trends than fundamentals. As long as liquidity continues to flow in the financial system, there will be no correction in the Indian bourses.

Steroids Take The Sensex Into Orbit

The month of January 2012 seems to have descended straight out of the good old days of 2003-2007. With the Sensex trading at around 17500 and the Nifty near 5300, nobody is remembering the bearish days of December. There has been more than 12% gains in the benchmark indices and much more than that in individual stocks. Even midcaps have rallied. So is this really one of the sunshine months of those wonderful years?

Like the mid 2000s?

Only partly. The part which does agree with that period is liquidity. In those years, the markets were awash with funds, funds which were responsible for the stock market and commodity market bubbles worldwide. We saw how liquidity changed sentiment when Bernanke released QE1 into the markets in 2009 leading to one of the fastest pullbacks ever in equity markets. This flood of liquidity is back and is showing no signs of ebbing. FIIs put over 10000 crores in Indian markets in the last one month and are putting in more each day.
Another common thing is that people have been wringing hands as they have been unable to get in. There is money on the sidelines that is jittery and likely being deployed at ever higher levels.
However, apart from that, there is little in common with mid 2000s. The market fundamentals are very weak and the markets are looking quite expensive. There has hardly been any significant positive news to justify the price increases. Europe, US, China and India: all four have growth problems in descending order of magnitude. The actions in the US and Europe have been to brush the problems under the carpet and in fact there has been no effort to really solve the intrinsic problems of the economies. The mid 2000s were based on real earnings increases which were sustainable in the long run (the absolute earnings being sustainable, not the increases).

Another big difference has been in volumes. Cash market delivery volumes are nowhere near levels which were common in those years. Retail investors continue to stay away from the markets. A bull market rally rarely runs on small volumes. That is more the characteristic of a bear market rally.

Liquidity: the ultimate steroid


The markets are on steroids and steroids as any doctor will tell you are very effective and powerful. Forget fundamentals, the Sensex could even take out another 1000 points on this rally. There is after all, no resistance on the upside as people are too scared to short. You see, the absolute absence of fundamentals in this rally gives it the feel of a pure momentum play and it is foolish to go against pure momentum plays. You could book profits in pure momentum plays, but should never short them. It is evident in the interviews of ‘market experts’. These experts are increasingly unable to justify prices as the problems of December still remain in a big way yet have nevertheless been coming out with buy lists. These lists too are heavily focused on momentum plays.
The good doctor will also tell you that steroids are bad in the long run because of significant side effects. Secondly, steroids are used only temporarily to support a diseased body. The cure never comes from steroids. I maintain what I wrote in my earlier article, (Markets at 16000 again) the Sensex does not deserve these levels.

Trading strategy

In end 2007, it was clear to many that markets had run ahead of fundamentals. This was clear even at 17000. People who sold out at these levels rued their impatience as they saw the Sensex rallying all the way to 21000. They were vindicated but much later, in January 2008. The call which one is to take is whether to risk selling out early or risk taking big cuts when prices inevitably, fall. What is to be clearly avoided is putting in fresh long-term money at these stages.
The buyers who have bought early on and who are guiding the market through their buying need liquidity to exit at high levels and by producing a one way move they have succeeded in drawing loads of traders back into the market. These traders will be left with uncovered positions the day the market tanks. It is clear that when it does tank, the cut will be savage. I feel a 300 point cut on the Nifty is not out of the question.
If one is to participate in a bull market, participate in the genuine bull run in precious metals. I will write on that soon.

Having said all this, the sheer amount of liquidity means that one can still take a call on the market purely from that perspective. The market is showing all the signs of a healthy bull market. The 300 point cut could also come after the markets hits 6000+. So, it may be prudent to play smart and participate in the rally as the music may continue for some time yet.

Disclaimer: To some extent, I was caught on the wrong side of the rally but am covering ground with fresh investments. I have also gone long on gold and silver.