some food for thought !

The growth fanatics say that high inflation is a temporary phenomenon and Indian Inc will be back on growth path few quarters down the road. They blame the current high rate of inflation on higher food and fuel prices and thus support the current regime of a loose monetary policy, which has resulted in negative real rate of interest . But how can they explain high double-digit inflation in counties such as Saudi Arabia, Russia and UAE, which are oil exporters and in Argentina, which prides itself on being one of the largest exporters of wheat, soya and meat in the world. Obviously, the reason for high global inflation levels lies elsewhere. And, the longer the central banks of the world and their bosses (politicians) stay wedded to economic growth, the greater will be the pain to the real economy. At least, that’s what historical evidence suggests. For the same reason that higher inflation hammers down stock market, the bull run is preceded by a period of low inflation , which is a precursor of sustained economic growth. The current bull run, which began in the second quarter of ’03, was preceded by a six years of low and declining rate of inflation. During 1999-2003 , the consumer price index in India hovered between 4% and 5%, the lowest in nearly a generation. Similarly, the high inflation period of mid-1990 s was followed by a lean patch in corporate earnings and a bear run in equities. By the time inflation began to decline from early 1999, it had damaged the basic fabric of growth . India Inc was saddled with surplus production capacity as a legacy of aggressive capacity expansion in mid-1990 s. So, even as inflation cooled subsequently, corporate earnings remained more or less flat for the next half a decade. The result was a flat stock market. What’s the assurance that history will not repeat itself this time?

Numerology may have little to do with macroeconomics, but the eighth year of every decade appears to bring with it bad news for the consumer. Over the past three decades, years 1988, 1998, and now 2008, have seen one of the biggest bites on the consumer’s wallet, with inflation in all these years touching double-digit figures. Incidentally, 2008 also brings to an end a period of unprecedented low consumer inflation, which started in 1999. The updated inflation figures for consumer price indices, CPI(IW), CPI(AL) and CPI(UNME), representing the index for industrial workers, agricultural labourers and urban non-manual employees, respectively, for June are yet to be compiled. However, these indices assign a higher weightage to food products, and there has been a sharp rise in the prices of food, especially cereals, milk and milk products, besides cooking oil. This is likely to push consumer inflation to the double-digit bracket exactly after a decade. If this were to happen, it would be in line with the trend seen since the 80s, where inflation during the eighth year of every decade figures in the 10%-plus range

Let’s consider CPI(UNME), which is largely a proxy for inflation faced by urban white-collared employees. The last time urban India faced high inflation was in 1998, when the annual average was 11.1%. Incidentally, CPI(UNME) crossed 10% in June 1998, something which is expected to happen this year as well. In 1998, seven months reported double-digit inflation, touching a high of 15.5% in November. Same is the case with consumer inflation for industrial workers and agricultural labourers. Inflation for agricultural labourers averaged 13% in 1998, touching a high of 19.6% in November. While inflation for industrial workers marginally fell short of the double-digit mark, averaging 9.5% for the year, it also hit a high of 18.3% in November, with six months reporting 10%-plus inflation. In 1988, consumer inflation for agricultural labourers and urban India hovered in the 8-9% range, crossing the 10%-mark in April. However, consumer inflation for industrial workers was not so modest and averaged 13.5% for the year, touching 15.5% in April. Interestingly, high inflation in the eighth year of each decade since 1980s came on the back of an opposite trend in the 1970s, when consumer inflation was low. For industrial workers, 1978 actually was a year of deflation when the price index dropped. Inflation for agricultural labourers and urbanites also averaged a modest 2.5% and 4% in 1978, one of the lowest annual consumer inflation that the country has witnessed since then. Moreover, the eighth year did not record the highest inflation in any decade, including the 1980s and 1990s. However, consumers can hardly take solace from this, as this could mean there is more pain that could become apparent in the next couple of years.


Small retail investors have lost a whopping over Rs 2 trillion(close to $50 billion) in market meltdown that began early this year.The overall market capitalisation has plunged by nearly a third or about Rs 24 trillion during this year from a peak of over Rs 72 trillion, in the bear run srarted after the Sensex peaked to 21,000 points mark on January 11.Out of this close to 60% loss has been in the promoters kitty themselves, with their holding depreciating by about Rs 15 trillion !

we had told earlier ...now its all happening ..enjoy with us :)

Repeated it many times in this blog as well as other forums that Markets are all set to test new bottoms in this June Series...we are delighted to see that markets have given Big Thumbs-Up to our meticulous analysis . In last night's market summary topic I had once again asked investor fraternity to go Short .Also i had told about increased volatility ..as can be seen today between 10:30 a.m. to 11: 20 a.m. Nifty went down from 4335 to 4225 and then between 11:20 a.m. and 1:30 p.m. Nifty made a jump of 100 points from 4225 to 4328 .

Dear Blog -Readers please note that on account of paucity of time i have to cut down on my frequency of calls at blog ...but since we have the investor(blog-reader) interest also at heart ,so few calls would be given at different times here . Last night Nifty Startegies were suggested and they have given great returns today

Nifty Strategies

In Nifty options, the far+mid OI is around 31 per cent. That's healthy without being outstanding. The mid and far put-call ratio (in terms of OI) is incidentally around 1.32, which seems rather low for this stage of settlement where 1.8 or higher is often registered.

Overall index PCR (OI) is around 1.37, which is in the normal range but we saw lower intra-day values on Friday. The stock option PCR was abnormally high at 0.4 given that it's rarely above 0.2. Stock option volumes were also fairly high. This could mean that sophisticated traders have finally started using these instruments to hedge in preference to options. Or it could mean that the fear factor is quite prevalent and even bulls in specific stocks are hedged. Perhaps it means a bit of both.

A bullspread of long June 4400c (47.55) versus short 4500c (18.55) costs about 29 and pays a maximum of 71. A bearspread of long June 4300p (68.2) and short 4200p (43.65) costs 25 and pays a maximum of 75. Both these spreads are likely to be struck and both offer excellent risk-reward ratios with expiry risks as an add-on !

If you're looking for wider spreads, a long July 4500c (105) and a short 4700c (52.6) offers a potential maximum return of 146 on a cost of 54. Similarly a long July 4300p (189) and a short 4200p (149) offers a potential maximum return of 60 on a cost of 40. The July put chain is short of liquidity below the 4200 mark.

Market Summary

I had cautioned investors in this blog on 1st June itself that June Series has a good amount of Short build-up ... Nifty is falling ever since that time and we have more Red remaining in this Series !!!

Settlement considerations may cause extra volatility and lead to a temporary improvement on short covering.


Inflation spiking to double-digits led to a market crash. The Nifty ended down 3.75 per cent, closing at 4347.5 points, which is a 10-month low. The Sensex was down 4.07 per cent closing at 14571.
There was continuation of heavy sales from the FIIs. Domestic institutions were also sellers. Breadth signals were terrible with advances heavily outnumbered by declines. Volumes were low. The Junior was down 4.03 per cent while the BSE 500 lost 3.64 per cent.


Outlook : The Nifty is likely to seek support at around 4200 before it attempts a substantial recovery. The upside is likely to be capped by resistance at 4600-4650 level. Settlement considerations may cause extra volatility and lead to a temporary improvement on short-covering.

Rationale : On Friday, the market broke key supports. This was a low-volume breakout but the minimum target projections would be about 4200. There is fairly good support at that level. Short-covering could cause some recovery during next week but the market is clearly in an intermediate downtrend (7 weeks and counting) that could get worse.

Counter-View : It would take a very strong trigger in the form of good news to lift the market now. Technically speaking, we would need a high-volume recovery that pushed the market beyond 4650 to break the pattern of an intermediate downtrend.

Bulls & Bears : Any bullishness next week is liable to arise on the basis of short covering and able to terminate at around Thursday June 19th levels. Banks for example, have been very hard-hit and there could be candidates here.

IT is another possibility because of the falling rupee and the cushion it offers. Oil exploration is a third segment. But the vast majority of stocks have emulated the index in that they have made clear downside breakouts. Despite settlement considerations, the prudent trader would be advised to stay on the short side of the market or to stay out.

Among the most badly hit sectors are real estate, housing finance stocks, construction companies and automobiles. No surprises here since these are all rate-sensitive and driven by consumer sentiment.

Market Summary

from bussiness standard .The market is likely to range between 4,400 and 4,800 in the nine sessions preceding F&O settlement for month of June.

The market crashed to a low of Nifty 4,370 and ended up at 4,517 after a small recovery. The Nifty was down 2.39 per cent week-on-week, while the Sensex lost 2.46 per cent to close at 15,189. It was another bearish week and the market hit the lowest levels seen so far in 2008. Volumes were reasonable, except on Friday when they were low. Declines far outnumbered advances.

The Nifty Junior was down 3.18 per cent and the Midcaps-50 was down 1.57 per cent, while the BSE 500 lost 2.37 per cent. The FIIs remained heavy sellers while domestic institutions were token buyers.

Outlook : The market is likely to range between 4,400 and 4,800 in the nine sessions preceding settlement and possibly test both ends of this range. A breakout beyond 4,800 is very unlikely, but if there is a downside break below 4,400, the market could drop till 4,200.

Rationale: The support at 4,400 was tested on several sessions and proved durable. But, resistances exist all the way up to 4,750-4,800. Huge volume expansion would be required to break those resistances and such volume expansion seems unlikely. The downside support is more likely to crack than the upside resistances.
A downside breakout will be quite dangerous given the lack of visible supports below 4,400. There would be a target projection till 4,200 .

CounterView: Given that index futures are trading at substantial discounts to spot values, the VIX is up and sector breadth is strongly negative, a substantial upside is unlikely. But, we could have big corrective sessions on short covering where the Nifty zooms by 100-plus points. A lot depends on the reversal of FII attitudes – they have sold over Rs 6,000 crore in June so far.

Bulls & Bears: High inflation and the hike in the repo rate were talking points along with mega-deals like Ranbaxy– Daichi and RCom-MTN. In terms of sectors, real estate was among the worst hit. Banks shares stayed stable following the repo hike after losing ground earlier. Action in this sector may be muted until the rate hike filters through the system.
But, no specific sector did really well and rupee-weakness failed to buoy up the CNX IT.
There was some positive action is fertiliser shares with Nagarjuna Fertiliser, Chambal Fertiliser and GNFC all ending strong. Otherwise, winners such as Aurobindo Pharma, Aban, Bharat Forge, Dr Reddy's, IDFC, etc were scattered and isolated. There was some positive action in telecom shares like RCom, Bharti and Idea Cellular as well as in Spice.

Troubled Times for Capital Markets

from bussiness standard It all started with the US subprime problem and the global credit crunch, which led the BSE Sensex nosediving from its peak of 21,206 on January 10,2008 to 14,645 on June 10. A part of the fall can also be attributed to the concerns pertaining to the increase in crude oil prices and its impact on india's economic growth.Some of the early signs were also visible from rising inflation and the slowdown in domestic industrial production numbers. This further led to concerns over high interest rates, slowing GDP numbers and thus, corporate earnings as well. Sensing these developments , FIIs(Foreign Institutional Investors) were the first ones to move out of market, and they partly became the reason for market fall.

Crude and bloating Fiscal deficit :
A $10 increase in crude prices reduces India's GDP growth by about 0.3% points . India imports about 70% of its oil requirements leading to huge trade deficit(over 7% of GDP).Fiscal deficit,which is currently at about 3% of the GDP could reach to about 10% levels if subsidies given to oil,food, farm,fertilizer are added.Hence further rise in crude oil prices will only make things worse.

High Inflation :
We are yet to see the cascading effect of recent spike in oil prices that will set in a regime of high inflation in the weeks to come.Inflation is heading towards 9% levels however it will soothe down if monsoon is good. High oil prices will further increase the cost of goods and the logistics costs itself is expected to go up by 10-15% as well.As if to join the league we have airlines increasing the fuel surcharge by 15-20% on ticket price.So, either companies will have to increase the prices of goods sold or services rendered or they will have to take a hit on their margins.This will certainly lead to overall cost push on other sectors and may discourage the consumer spending further .In both cases either the sales volumes will come down or margins, thus lowering earnings for companies.

Interest rate worries :
One of the objective of monetary policy in india has been achieving price stability , which the RBI may try to achieve even at the cost of giving up growth . If inflation spirals , RBI resorts to raising CRR(cash reserve ratio) or repo rate(repurchase rate),depending on the prevailing situation.The RBi's comfort level for inflation is 5.5% whereas we are inching closer to 9%.With increase in interest rates ,50-75 basis points could get shaved-off from GDP growth figures.

Earnings Slowdown :
The high interest rates alongwith the factors like inflation and higher commodity prices will hit India Inc. negatively. The domestic cost of capital has already increased , with the prime lending rates having gone up by 175 basis points since the second half of 2006 to 12.5 currently . Also the housing loans have become more expensive , as a result the bank credit has come down to about 24% as against the recent high of 30% in January 2007.This will not only hit banks income growth but also that of companies , due to high interest outgo and slowdown in cosumer demand.The early sign of this is seen in Q4 IIP no.'s of 5.8% as against over 10% a few months ago.

Foreign Capital :
Because of the above cited reasons FIIs have lowered their exposure in Indian equity markets . The depreciating rupee further lowers their return in dollar terms. No wonder then that FIIs have been net sellers of indian equities to the tune of about $4.2 billion with almost $1.2billion of this selling coming in May alone!Given the high levels of risk aversion and P/E contraction , expect muted flows in near term . Fund flow for the rest of the year will depend on global news flow and the perception of risk amongst investors . Also,rising trade and fiscal deficits are not viewed very favourably by FIIs.

Global Markets :
Global markets are going to remain weak in coming 12 months.US Housing Data continues to get worse,record number of businesses are filing for bankruptcy(5,000 in April 208 alone).So far , major banks and other financial institutions across the world have reported losses of about $380 billion. S&P(Standard & Poors) has lowered credit ratings of Merrill Lynch, Morgan Stanley and Lehmann Brothers since they have to book more write-downs on devalued assets.

Saving grace:
r economy is broadly linked to monsoon-->a gud monsoon leads to gud crop n that in turn solves the myriad problems at bottom of pyramid-->farmers get gud money for their crops ,they r able to repay their loans on time--> banks reduce their exposure to bad loan debts, balancesheets of banks n finace institutions improve -->inflation comes down -->RBI can then focus on growth n cut interset rates--> india growth story finds takers abroad--> FII's return baq cing the bright outlook of economy

A positive ream of global newsflow is also essential givn the fact that we are living in globalised times and its actually the follies of Big Brother (US) that has ushered in a wave of untold misery at global capital markets .

Is Oil Really on the Boil ? : A New Perspective to Oil-Mania

It is claimed by all and sundry (government, oil companies, the market) that there is a net subsidy (under-recovery) of about Rs 225,000 crore. And that the poor man's fuel, kerosene, was, until recently, being heavily subsidised. Various facts about the market and domestic price of four energy items (kerosene, LPG, diesel and petrol) are presented for two different assumptions of international oil prices: at $80 and $130 a barrel. The concern here is not what the net tax on oil should be; rather, it is whether the GoI oil policy is transparent.

Five major oil facts are interesting, if not revealing. First, and most unusually, the price of diesel in India is considerably below (25% less) the price of petrol; the world prices diesel at 20 per cent above the price of petrol. Second, the consumer price of petrol in India is more than that in the US (at $4.40 a gallon), and among the highest in the developing world. In China, petrol is priced at only 74 cents a litre, compared to the average Indian price of $1.17 a litre. Third, with oil at $80/barrel, use of kerosene was being taxed by 5 per cent. Most people (including myself) believe that use of kerosene has been heavily subsidised. Fourth, at $80/barrel oil, the total tax gain to the economy was around Rs 91,000 crore; today, at $130/barrel oil, the total loss (subsidy) is only Rs 25,000 crore or only 0.5% of GDP. Fifth, and finally, there is little sign of the 5% of GDP loss figure (Rs 225,000 crore), which is fashionably being touted around as the loss from our oil policy. How is this patently false figure obtained? Via the oiliness of Indian policy, which is to first impose a tax on produced oil, and then sell it at a somewhat lower price, and then sell oil bonds to make up some of the difference! At the end of it, no one knows whether there is actually a subsidy or a tax, and what its cost to the economy is. A numerical example can help illustrate. Assume international oil is at Rs 100; there is first a Rs 50 tax, then a Rs 25 subsidy. The government claims it is subsidising by Rs 25, when it is indeed taxing by the same amount! The figures presented are also disturbing. Why is there not much more scrutiny and discussion about the oily expenditures involved with other non-transparent government policies? Such expenditures are greater, and help the poor less. But a greater problem might be that the government (RBI, Ministry of Finance, etc) may be making policy based on the certainty of $150-170/oil for the next year when there is not enough evidence to warrant this conclusion.

The oil bulls are correct in their explanations of why prices have jumped. It's indisputable that worldwide demand has surged, chiefly driven by strong growth in China, India and the Middle East. It's also true that most of the world's reserves are controlled by governments in places like Russia and Venezuela that mismanage production, thus curtailing supply growth.
But rather than forming a permanent new plateau for prices - as the bulls contend - those forces are causing a classically unstable market that's destined for a steep fall

In a normal oil market, the cost of producing the last, most expensive barrel of oil needed to satisfy worldwide demand sets the price for every barrel the world over. Other auction commodity markets work much the same way.
So even if Saudi Arabia produces at $4 a barrel, if the final, multi-millionth barrel required to heat houses and run cars costs $50, and is produced, for argument's sake, at a flagging field in West Texas, the world price is $50. That's what economists call the equilibrium price: It's where the price that customers are willing to pay meets the production cost, including a cushion, naturally, for profit or "the cost of capital."
But today, the sudden surge in demand and the production bottlenecks have thrown the market radically out of balance.
Almost exactly the same thing happened in the housing market. And both housing and oil supply react to a surge in demand with a long lag. In housing, the lag is caused by restrictive zoning and development laws, especially in coastal markets like California and Florida.
So when the economy roared back in 2002 and 2003, builders couldn't turn out homes fast enough for buyers armed with those cheap mortgages. As a result, prices spiked. They no longer bore any relation to the actual cost of buying and improving land, or constructing and marketing a new house (at some reasonable profit margin). Instead, frenzied buyers were setting the price.
Because builders were reaping huge windfall profits, they rushed to buy and develop land. And sure enough, those new houses were ready just as buyers were retreating to the sidelines because they could no longer afford to buy a home. That vast overhang of unsold homes is what's driving down prices today.

The story is much the same with oil, with a twist. A big swath of the market isn't really paying that $125 a barrel number you hear about seemingly every hour. In China, India and the Middle East, governments are heavily subsidizing oil for their consumers and corporations, leading to rampant over-consumption - and driving up prices even more.
But sooner or later the world won't keep paying those prices: Eventually, the price must fall back to the cost of that last barrel to clear the market.
So what does that barrel cost today? According to Stephen Brown, an economist at the Dallas Federal Reserve, that final barrel costs just $50 to produce. And when the price is $125, the incentive to pour out more oil, like homebuilders' incentive to build more two years ago, is irresistible.

We've learned another important lesson from the housing market: The longer prices stay stratospheric, the worse the eventual crash - simply because the higher the prices and bigger the profit margins, the bigger the incentive to over-produce !

A similar scenario occurred following the price explosion in the 1970s and early 1980s. The price spike caused the world to cut back sharply on oil consumption. By the mid-80s, oil prices had fallen from almost $40 to around $15. They remained extremely low for two decades.
It's impossible to predict how the adjustment this time will take shape, just as it was in housing. There the surge in supply came in places the experts swore there was "no supply," and wouldn't be any. Builders found a way to extend vast tracts of homes into California's Inland Empire and Central Valley, and even build "in-fill" projects near the densely-populated coasts.

An earlier bubble is also instructive. In the early 1980s silver prices jumped from $10 to $50 on the theory that the world was facing a permanent shortage of silver. Suddenly ads appeared asking homeowners to bring their tea sets and jewelry for a big price. Silver supplies poured from seemingly nowhere, out of peoples cupboards, of all places.
And so it will be with oil. We don't know where the new abundance will come from, from shale, or tar sands or coal or an OPEC desperate to regain market share. We just know that it will appear.With prices like these, it always does , as history has the knack of repeating itself !!!

As i had said : Markets fell by 5% at very start of June Series

Sensex fell by 5.2% at start of June series
wheras Nifty fell by 4.98% . In my last post i had forewarned about markets being edgy in this June.
Those who heeded the advice and went short must be laughing their way to banks even as markets r bleeding bigtime !

Also its nice to see the gov finally increasing the retail price of petrol & diesel. I had argued passionately on the necessity of such an increase in my post "Impact of weak dollar on oil prices"

Cautious June Series Ahead

The following article from BS has some startling revelations
After the tough time in May grim outlook for June is anticipated .May lived upto its image of a losing month.The Sensex dipped 5.04% in May,the month also continued its bizarre trend of falling in even years which began with the year 1998.It also fell in 2000,2002,2004 and 2006.This was the ninth instance of the markets falling in the last 19 years and average loss also seen in may,which was 0.85% till last year , increased to 1% after this fall.

Going by history though June is not scray at all , infact its rock solid . However the signals emanating from derivatives segment aren't all that rosy ...given below is analysis for the same

We are beginning the next series with a carry over Open Interest(OI) of Rs. 58,605 crore,the highest so far since the expiry of December derivatives when the residual OI was Rs. 94,315 crore with which we began the January series. In absolute terms the current OI is 37% lower than the one with which we began the Jan series,So apparently this does not seem to be an issue >but herein lies the catch !!!
If we now bring in the average daily volumes of the derivatives into picture the vision gets corrected.OI of Rs. 84,315 crore seen at the closing of Dec series is 1.37 times the average daily volumes of Dec.Compared to current OI of Rs 58,605 crore is 1.5 times the average volumes of May . The percentage fall in OI between Dec 2007 and may 2008 is lower than the volumes which have dipped more..though OI at month beginning is seldom much of an issue , it could become problem area if the market develop weak knees again.
Another danger is high PCR(Put Call Ratio) at the beginning of new settlement . PCR of 2.08 is highest for any June series in the history of derivatiaves trading in india.This high magnitude of PCR indicates that puts have been horded by wary investors.Of the total Puts in June series 38% of OI is in 4,800 series and 15% in 4,700 series.These indicate support levels but Puts have been bought for levels as low as 4,100 which account for a staggering 11% of OI !!!
Nifty is currently in a very tight 4,800-5,200 range. But the fact that the process of lower top and lower bottom formation has begun does not quite augur well for the month of June which otherwise has an immaculate track record .