We are now in a Catch-22

Just two weeks ago I wrote (read here) that with the depreciation of rupee, we are having a bigger risk of retail inflation (and also core inflation) moving up again at an unabated speed. There were people who privately wrote to me and criticized me for negativity. I am sure that after reading below details they will understand that the negativity was justified.

Today, we have got the July inflation numbers. The inflation surges to 4-month high. July Primary Articles inflation at 8.99% vs 8.14% in June. July fuel & power inflation at 11.31% vs 7.12% in June. July manufactured products (will be a part of the core inflation) inflation at 2.8% vs 2.73% in June. July WPI Inflation at 5.79 % vs 4.86% in June.

In other words, we are in a stagflation economy now. In simple words, we have inflation without growth. This is extremely difficult situation for any central bank (RBI) to control. Remember that the primary job of the central bank is to control the inflation. The central bank does this by giving away growth (RBI did this by increasing interest rates during last almost two years). But now we have already compromised the growth without any impact on inflation. RBI can not reduce the interest rates as inflation is still there and growth will not return unless the easy money is provided. We are now in a classic Catch-22.

God bless us!!!

Look forward to receiving your response/feedback/criticism/praise.

Regards,

Niteen S Dharmawat

IMPORTANT DISCLAIMER: Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective. The information contained herein is based on analysis and up on sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations above. I sincerely request you to do your homework before you take any position whatsoever. I, my relatives or friends may have position in this company.

The return of the devil…

I am writing after more than 2 years. This was because of various regulatory constraints due to my last job.

Let me cover the macro picture today.

 

It would be apt to term it as macro “puncture” of the economy. We are in complete disarray and the government in office is making every last minute efforts to avoid the ‘big’ crisis that we are heading towards.

Generally, I am a very optimistic person but considering the current state of affairs, I have turned completely pessimistic. The road towards the recovery is very patchy and without predicting or speculating the outcome of the next loksabha elections, I am of the firm opinion that the current self-made economy woes will be hitting us hard.

We are now almost fighting a losing battle. We are unable to control the inflation despite having tighter monetary policies running in for almost two years. I warned multiple times earlier that inflation will come back. These articles are dated November 4, 2008, December 23, 2010 and January 30, 2009 (Click here for details: 1^st article, 2^ndarticle and 3^rdarticle).

According to people from the opposite camp, the time has come for RBI to ease monetary policies. They argue that the core inflation is at its lowest levels. For novice like me and to keep it simple, the core inflation is something that excludes items like energy, food products etc. The people from opposite camp forget that the retail inflation, which forced RBI to take stringent monetary policies, has not moved by an inch. Retail inflation is something that hurts middle and poor class the most when food prices go up. Now with the depreciation of rupee, we are having a bigger risk of retail inflation (and also core inflation) moving up again at an unabated speed.

The approach to control the inflation was grossly wrong. The inflation was visible before the last loksabha elections. So in a way, we are in the inflationary economy for last more than 5 years now. The government before the elections committed that it will control the inflation in flat 100 days if it comes to the power. It could have been done, had the government focused on fiscal disciple. This is where the government went wrong. They tried to cure the inflation which was because of fiscal issues by using tighter monetary policies of the RBI. This has broken the backbone of the corporate world esp. with high debt. The fiscal deficit was because of mindless spending on various so-called social schemes. Most of these schemes are unproductive and marred with corruption. The real beneficiaries do not get the most of out of it and the society at large is deprived of the scared resources.

The second problem which emerged was because we were importing (mainly crude, gold-silver, consumer goods/electronic items etc.) more than we were exporting (IT services, agriculture products, manufactured products etc.). This led to the Current Account Deficit (commonly called CAD) which means shortage of dollars. Now we needed more dollars to fill the gap created by CAD. There were two options: either we increase our exports or we get dollars through investment. The first one is a long process and with current situation world-over, we were left with only second option of going behind investments. Here, to get investment we had two options again. One was through Foreign Direct Investment (FDI) which is a time consuming process and would have required many fundamental changes in the economy. So we went behind the second option which was getting dollars mainly through Foreign Institutional Investors (FIIs). In technical language, we were filling in the gap created by Current Account through Capital Account. The money from Capital Account is easy money and has a risk of fleeing away quickly. If FIIs start pulling out money, you are heading for a situation similar to what Asian countries witnessed in late 90s.

The best would have been control CAD and that too much before. Our forefathers have argued to spend based on our means. But we conveniently forgot and stretched ourselves too thin and too long. The government has shown some signs of the courage by initiating policy actions. But it seems to be a case of too late and too little with seemingly little political backup due to looming elections.

My heart says that we are going to come out of this mess but my mind disagrees. I only wish that post elections; we get a stable government at center which takes constructive and firm decision on economy front. Till then I sign off and wish happy investing to all of you.

Look forward to receiving your response/feedback/criticism/praise.

Regards,
Niteen S Dharmawat


IMPORTANT DISCLAIMER: Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective. The information contained herein is based on analysis and up on sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations above. I sincerely request you to do your homework before you take any position whatsoever. I, my relatives or friends may have position in this company.
 

Sabero now at Rs 78: A return of 95% in 3 months...

Sabero now at Rs 78. It was recommended a buy on Rs 40 or below on 12 Feb 2011. It has gone up 95% in 3 months time from the recommended price.

Trust you benefited from the recommendation...

Read earlier post on Sabero: http://dharmawat.blogspot.com/2011/04/sabero-updates-52-returns-in-less-than.html

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Cheers,
Niteen S Dharmawat
http://dharmawat.blogspot.com/

IMPORTANT DISCLAIMER: Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective. The information contained herein is based on analysis and up on sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations above. I sincerely request you to do your homework before you take any position whatsoever. I, my relatives or friends may have position in this company.

How to identify winning stocks – a guest post

Hi,

I have written a guest post for Subhankar.

How to identify a winning stock without depending on tips? What are the parameters that help in choosing a winner?

The most important parameter is the ‘Margin of Safety’. The concept of margin of safety was first introduced by Benjamin Graham, author of investment classics like ‘The Intelligent Investor’ and ‘Security Analysis’.

Read more at: http://investmentsfordummieslikeme.blogspot.com/2011/04/how-to-identify-winning-stocks-guest.html

Cheers,
Niteen S Dharmawat
http://dharmawat.blogspot.com/

Sabero Updates: 52% returns in less than 2 months time

Sabero was recommended a buy on 12 Feb 2011 at a price of Rs 40 or below. Despite its strong fundamentals the stock was undervalued and was available at a significant discount.

The stock is now trading at Rs 61 and touched an intra day high of Rs 63. It has given an appreciation of more than 52% return in less than two months time.

This is not a buy call now but the regular update. I will continue to hold this and will buy if it comes down.

Those who missed my earlier mailers on this stock can access the same using the following links:
http://dharmawat.blogspot.com/2011/03/sabero-organics-gujarat-confidence.html
http://dharmawat.blogspot.com/2011/02/sabero-organics-gujarat-ltd-buy-at-rs.html
http://dharmawat.blogspot.com/2011/02/sabero-organics-3rd-quarter-results.html

Cheers,
Niteen S Dharmawat
http://dharmawat.blogspot.com/

IMPORTANT DISCLAIMER: Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective. The information contained herein is based on analysis and up on sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations above. I sincerely request you to do your homework before you take any position whatsoever. I, my relatives or friends may have position in this company.

Sabero Organics Gujarat: Confidence reaffirmed

Sabero Organics Gujarat which was recommended a buy recently (Feb 11, 2011) has moved up today by more than 17% (volume 390,000 shares already traded) and is currently trading at around Rs 44. The reason for the sharp increase is the rating assigned by CARE (see below) to the various bank facilities of Sabero. This news just reaffirms the confidence in this stock. I have highlighted in my analysis that the financial position of this company is strong and one (or couple of) blip/s in the quarterly performance/s should not be a reason to discard the stock.

Trust you will find this of use.

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CARE assigns ratings to the various bank facilities of Sabero Organics Gujarat
Tuesday, March 29, 2011

Credit rating agency, CARE has assigned CARE BBB+ ratings to Sabero Organics Gujarat (SOGL) long-term bank facilities for Rs 100.57 crore. The agency has also assigned PR3+ ratings to SOGLs short-term bank facilities for Rs 173.75 crore.

Further, the agency has also assigned CARE BBB+/PR3+ ratings to SOGLs long-term/short-term bank facilities for Rs 62.75 crore.

The ratings are further strengthened by modest financial position with moderate leverage and debt servicing indicators and healthy profitability margins.

Sabero Organics is an established player in the agrochemical industry which manufactures and sells a variety of specialty chemicals and crop protection products. It has a diversified product portfolio for insecticides, herbicides, fungicides and specialty chemicals.

Source:
http://www.careratings.com/current/1/10992.pdf
http://www.cafestocks.com/newsDetails.do?newsId=9000130787

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Cheers,
Niteen S Dharmawat
http://dharmawat.blogspot.com/

IMPORTANT DISCLAIMER: Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective. The information contained herein is based on analysis and up on sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations above. I sincerely request you to do your homework before you take any position whatsoever. I, my relatives or friends may have position in this company.

Economy v/s Sensex

Hi,

Our economy/GDP touched a 1 Trillion mark in Nov 2007. We will become a 2 Trillion economy in next 19 months. This will be a phenomenal growth because many would not have expected us to touch 2 trillion so early. We are in the elite club of a trillion and GDP size-wise are amongst the top 10 nations in the world. If we continue to grow at 9% per annum then we will become a 5trillion economy by 2023. However, if due to some unforeseen reasons the growth rate comes down and we manage to achieve an average growth rate of 7% YoY then the 5 trillion economy number will come by 2025. (and we are not talking about several sound initiatives which will be required to consistently achieve a growth rate of 7-9% YoY for next 12-15 years).

The GDP to M-CAP is equal or 0.90% of GDP in fair market scenario. Presently the Sensex is at 18000 levels and the size of the economy (nominal) is 1.43 trillion (as of today will be more than 1.43 trillion). If the economy reaches to 5 trillion then the Sensex number should reach anywhere between 50,000-60,000. Looks ambitious but still very much possible...:-)

This scenario is especially important to bring the importance of long term investment v/s short term gains(?).

Views are welcome.

p.s.: I have taken an average 7% growth of the GDP (the government is expecting a GDP growth rate of around 9% but I am taking an average 7% since we might have some period when it might not grow that fast). If the GDP growth rate of 7% is achieved then the GDP will reach to 5Tn by 2025 from present 1.4 trillion (if the growth is 9% then 5 trillion it will be by 2023).

Normally, the GDP to market cap figure is 1 or 0.9, in normal circumstances. Our present market cap is around 1.20 trillion and the GDP is 1.4trillion (a ratio of close to 0.85). When the Sensex was at 21000 the market cap was 1.36 Trillion and the ratio between Market cap and GDP was 0.97. With the same corollary the Market cap will be close to 4.5-5 Trillion by 2023/2025, an increase by 4 times at least. So the Sensex will reflect that accordingly and may see a figure of 75000, I am being conservative putting a number of 50-60k to Sensex.

Cheers,
Niteen S Dharmawat
http://dharmawat.blogspot.com/

IMPORTANT DISCLAIMER: Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective. The information contained herein is based on analysis and up on sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations above. I sincerely request you to do your homework before you take any position whatsoever.